The People’s Bank of China Finally Offers a Peek Behind the Curtain

(Bloomberg Businessweek) -- It was the only lender in Mao Zedong’s era, taking orders from the top to control the flow of money through the command economy. Now, even after decades of financial liberalization, the People’s Bank of China has its hands on far more levers than other global central banks as it works to keep the nation’s 40-year growth streak humming along..From its imposing headquarters in Beijing’s Xicheng District, the PBOC relies on a number of tools to direct the flow of liquidity in the $40 trillion-plus financial system. The seven-decade-old institution channels cash to development banks that finance the government’s pet projects and leans on commercial banks when it needs to make it easier or harder for companies and people to borrow. The PBOC has also amassed one of the largest troves of reserves in the world, a $3 trillion horde that’s chock-full of U.S. Treasuries..Now, as China is poised to greatly expand foreign companies’ access to its capital markets, the once-cloistered central bank is opening up, too. As part of the march toward greater transparency, PBOC Governor Yi Gang granted Bloomberg News a rare interview on June 7. The 61-year-old economist said one of his top goals “is to make my monetary policy more transparent, so that the whole society and the world can have the right expectations.”.A good portion of the 35-minute discussion touched on a topic that’s also commanding the attention of Yi’s peers at the Federal Reserve and the European Central Bank: the role of central banks in supporting growth amid an escalating confrontation between Washington and Beijing..There’s “tremendous” room to adjust policy, Yi said, conceding that tariffs have been a drag on exports and the economy. If President Trump makes good on his threat to slap duties on all U.S. imports from China, “that would be a disaster for the global economy,” Yi said. As for the yuan, which has been close to breaking through seven to the dollar as economists pare back their Chinese growth forecasts, he says that “a little bit of flexibility of renminbi is good for the Chinese economy and for the global economy, because it provides an automatic stabilizer.”.One of the ironies of Trump’s frequent complaints that China manipulates its currency is that all recent signs are that, if anything, the PBOC has been acting to support, not weaken, the yuan, according to analysts. “The central bank of China is pretty much not intervening in the foreign exchange market for a long time, and I hope that this situation will continue,” Yi said..Like Zhou Xiaochuan, the long-serving PBOC governor he replaced in 2018, Yi is a reformer who’s at ease on the global stage, thanks to his fluent English and stints studying and teaching abroad. Recently, his portfolio has expanded beyond monetary matters, as Vice Premier Liu He has drafted him onto the team negotiating with the Trump administration to roll back tariffs on Chinese goods..Those talks broke down in May, leading both sides to ratchet up duties on each other’s products and broaden the confrontation into new areas. The Trump administration has declared a ban on business with telecommunications giant Huawei Technologies Co., while China’s Ministry of Commerce announced on May 31 that it’s assembling a list of “ unreliable entities” that will include foreign enterprises, organizations, and individuals that don’t obey market rules, violate contracts, and damage the interests of Chinese companies. While the list hasn’t been made public, Ford Motor Co.’s main joint venture in China was recently cited for antitrust violations, while FedEx Corp. is being investigated for “wrongful” deliveries..Recent data suggest China’s economy is decelerating again despite a fresh dose of stimulus. The challenge for the PBOC is how to support the near-term goal of shoring up growth without abandoning the longer-term objectives of reducing risk in the financial system and curbing the expansion of debt, which now approaches three times annual economic output..Yi has already lowered the share of deposits banks need to keep at the central bank—known as the required reserve ratio—and economists expect more reductions to free up funds for loans. He’s also ensured money markets have ample liquidity, a crucial step in avoiding a credit crunch if a lender runs into trouble, as happened with Baoshang Bank, which was seized by regulators this month. At the same time, Yi hasn’t moved benchmark interest rates, which haven’t changed since late 2015. China’s monetary policy has “to be in a sober mind position,” he said. Fiscal support, in the form of tax cuts, is helping, too, meaning “the current package is able to cover the cases where the situation is getting a little bit worse,” he explained..Coordination of fiscal and monetary policies is harder to pull off in countries with independent central banks, but not in China, where the PBOC reports to the State Council (the equivalent of the cabinet). While that means policymaking is often dictated by political considerations, it can also help deliver a speedy response to cyclical swings in the economy. “The head of the Fed in China is President Xi,” said Trump in a June 10 interview on CNBC, as he lamented his own lack of control over monetary policy..Larry Hu, chief China economist at Macquarie Group, notes that Yi’s willingness to meet with foreign reporters is encouraging. “Being able to communicate well with Western investors is a powerful weapon, not only for Jack Ma but also for Chinese central bankers,” he says. —With Malcolm Scott, Tom Mackenzie, Haze Fan, Xie Heng, Yinan Zhao. .To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net, John LiuJeff Black.©2019 Bloomberg L.P..With assistance from Bloomberg

The People’s Bank of China Finally Offers a Peek Behind the Curtain

Even after decades of financial liberalization, the PBOC has its hands on far more levers than other global central banks.

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