Ｇｒａｙ Ｈａｉｒｓ ｏｆ Ｍｒ． ＲＭＢ

Various queries and disputes have arisen about the inconstant monetary policy in reserve requirement ratio and interest rate. Zhou Xiaochuan, head of the Peoples Bank of China (PBC), is under great stress.

In the first half of 2008, the PBC increased the reserve requirement ratio for 5 times; subsequently, it cut the interest rate for 5 times in the second half of 2008. Though such adjustments embody the resoluteness of the policy-makers in dealing with the change of economic situation, many people criticize the policy-makers for their lack of foresight in the economic situation. This puts Zhou Xiaochuan under great stress.

Gray Hairs of Zhou

Xiaochuan

Zhou Xiaochuan, Head of the PBC, when appearing in the public view, used to look elegant and vigorous with no gray hairs to be seen.

However, at the beginning of October 2008, when he appeared in the Diaoyutai State Guesthouse, he looked much older and more tired than before.

On October 26, he had more gray hairs when he made a report on enhancing the monitoring of the financial macro-control to the Standing Committee of Peoples Congress. He said: “The number of unstable and uncertain factors in the international economic environment has an obvious increase. Problems also exist in our domestic economy. We have tough and onerous tasks in deepening reform, promoting development and keeping stable.”

Maybe the complicated macro environment and arduous tasks forced him to pay no attention to his individual image. At that time, the economic departments of China had already changed the “tight monetary policy” at the beginning of 2008 into the “flexible and prudent monetary policy”. In September and October, the PBC cut the interest rate for twice and lowered the reserve requirement ratio by 0.5 percent.

On November 5, the “appropriately loose monetary policy” was officially put forward in the standing conference of the State Council and was approved to carry out. However, Zhou Xiaochuan cannot relax himself. On November 10, the PBC convened a conference and put forward 5 measures to carry out the “appropriately loose monetary policy”. Then the PBC lowered the interest rate by 108 benchmark points, which was the largest decrease in 11 years. On December 22, the PBC Bank, as the public expected, cut the interest rate by 27 benchmark points.

The financial crisis has not ended and the stress over Chinas economy is increasing. Against this background, Zhou Xiaochuan has more and more gray hairs. On December 2008, when he turned up in Hong Kong, he looked more tired and haggard, though his tone was still as timid as usual.

Zhous gray hairs came out when Chinas monetary policy was changing. The queries came one after another: the PBC is slow in responding to the changeable financial situations. When the macro economy began to take the decline trend and many small- and medium-sized enterprises had operation problems or even went bankrupt, the PBC was still sticking to the tight monetary policy and showed no apparent signal of changing it. This somewhat influenced the micro-main bodies future expectation.

Shift of the PBC

“The PBC seems a bit innocent when facing those blames. The change of the monetary policy seems to lag behind the real financial development,” said Lu Zhengwei, chief economist of Industrial Bank, “but at the beginning most people support the monetary squeeze. No one expected that the international financial situation changed so fast and exerted so much and deep influence upon Chinas domestic economy.”

Zhou Xiaochuan, who was once called “the most resolute leader of the PBC” and “Mr. RMB”, became a man “walking on the wire rope”. He hesitated between the goal of controlling the inflation and promoting the economic growth.

In the 2007 China Central Economic Conference the government fixed the primo task of macro-control in 2008: preventing the economic growth rate turning into “overheating” from “over-speeding” and preventing the price increase turning into “obvious inflation” from “structural increase”. It was also decided that the stable financial policy and tight monetary policy would be implemented in 2008.

Therefore, the PBC, whose aim is anti-inflation, increased the reserve requirement ratio of the RMB by 0.5% for four times on January 16, March 18, April 16 and May 12. On June 7, it increased the reserve requirement ratio by 1% and enhanced the support to the loans for the agricultural use and the rebuilding after the Wenchuan Earthquake.

However, at that time, gradual changes occurred to the hot Consumer Price Index (CPI). From the fifth month of 2008, the CPI fell below 8% and made a monthly drop.

In Lu Zhengweis opinion, the changes of the CPI clarified the necessity of the tight monetary policy. The problem is whether such a policy should be still effective after the inflation situation became stable.

At this time, the sub-prime crisis in the USA deteriorated and exerted influences upon Chinas export and finance. Influenced by the foreign and domestic factors, Chinas economic growth inevitably slowed down.

Therefore, On July 25, 2008, Chinas central government convened a meeting and established the economic task in the second half of 2008, in which the aim of macro-control was to keep the economic growth rate and to control the prices.

Two days later, the PBC convened the quarterly conference for monetary policy, establishing the direction and measures of the monetary policy in the next stage. The conference accentuated that China must maintain the continuity and stability in economy and make its financial macro-control have more foresight and become more targeted and flexible. It also required the relevant departments to take a good control of the key points, rhythm and strength of the macro-control.

Till September 15, 2008, the PBC for the first time cut the benchmark loan rate and reserve requirement ratio.

Many experts believe that the cut of those two indices meant the shift of the PBC, though it didnt make an apparent official declaration.

“Maybe the change is slow in its process,” said Yang Tao, Deputy Director of Research Center of Monetary Theory and Policy, Institute of Finance & Banking, China Academy of Social Sciences. According to him, the PBCs vagueness in the change of monetary policy influences the micro-main bodies future expectation. It is the reason of why the public criticized the monetary policy.

Yang Tao also said that it was very difficult to fix proper time to change the monetary policy, both for China and the world. The European Central Bank increased the interest rate in May 2008 and gave out optimistic outlook of the future financial situation. However, obvious recession hit the euro area in the third quarter of 2008.

“We should see the monetary policy from the historical point of view. From the end of 2007 to the beginning of 2008, large inflation stress really existed in our country,” said Yang Tao. Anti-inflation is always the NO.1 task of the PBC. The stipulations in the Law of the Peoples Republic of China on the Peoples Bank of China also say that the primary target of the monetary policy is to keep the stableness of the currency value.

Presently Zhou Xiaochuan has to watch out for the possible alternating appearance of the inflation and deflation. He also has to face the queries from the outside. Meanwhile, he must maintain the economic growth rate through the flexible monetary policy. Those factors distract him from his appearance and explain his gray hairs.

The Direction of the

Future Policy

The query of “late change” makes Zhou Xiaochuan more cautious to the direction of future monetary policy.

On December 22, 2008, the PBC cut the interest rate by 0.27% and the reserve requirement ratio by 0.5%, which was the fifth time in one hundred days. However, the decreasing extent was lower than the market expectation. Many experts also believe that there is still room for another decrease of the interest rate and reserve requirement ratio in 2009.

In Lu Zhengweis opinion, such adjustment is a must for the PBC to deal with the inflation and improve the efficiency of the expansive policy. According to his prediction, the interest rate of the term deposit will drop by 1.17% to 1.44% at the end of 2009. The reserve requirement ratio of the big four state-owned banks (Industrial and Commercial Bank of China, Construction Bank of China, Agriculture Bank of China and Bank of China) will drop by 10% to 12%.

Li Daokui, professor in the School of Economics and Management, Tsinghua University, also said that the decrease in the interest rate was just the beginning of a series of activities of the PBC. Following that the more monetary policies will come out, including the increase in the currency issuance and the scale of loans. Those policies all aim at changing the market expectations in the first quarter of 2009.

However, there are many difficulties in realizing the goal. Both Lu Zhengwei and Yang Tao believe that realizing this goal has its possibilities as well as difficulties. All in all, we all anticipate a new situation in 2009. Zhou Xiaochuan and his PBC, undoubtedly, have to assume great responsibility in the future.