China's opaque PBOC finds new policy tool in communication

[BEIJING] The famously opaque People's Bank of China is finding more of a voice, with a relative flurry of comments this month giving rare clarity on its thinking.

The latest came Monday with a statement urging investors not to focus too much on short-term concerns and saying the diverging pace of credit expansion doesn't mean monetary policy is losing steam.

Days earlier, after data showed the weakest credit growth in two years, PBOC research bureau chief economist Ma Jun said the slump hasn't hurt growth, suggesting a big policy move wasn't imminent.

There have even been rare public signs of debate, with National Development and Reform Commission researchers on Aug 3 publishing a call for rate cuts when appropriate. That line was deleted hours later from the online statement, and soon followed by another PBOC signal it's not cutting rates any time soon. NDRC officials got back in step with the central bank Tuesday, saying they don't see major changes in economic fundamentals.

Some economists have dialled back forecasts for monetary easing amid the chatter, though the median forecast is still for a further interest-rate cut and lower banks' required reserve ratios, according to a Bloomberg survey. Mizuho Securities Asia Ltd said Aug 9 it no longer expects cuts to either this year.

The central bank "is saying that the current pattern of growth is fine," according to David Dollar, a senior fellow at the Brookings Institution in Washington and former US Treasury attaché to Beijing.

"The PBOC is concerned about rising corporate leverage and doesn't want to ease monetary policy further, while other agencies are more focused on maintaining investment. It's good that these debates have become more public."

The Financial News, a newspaper published by the PBOC, cited an unidentified analyst Wednesday as saying China shouldn't overly reply on monetary policy to stimulate the economy. Fiscal policy has sufficient room to offer support because the government has a large amount of assets and its debt ratio isn't high, according to the report.

While the debate is more public, the decision making process remains shrouded. While central bankers for Europe, Japan and the US enjoy independence, PBOC Governor Zhou Xiaochuan and his colleagues don't have final say on major policies.

Unlike major peers, the PBOC has no schedule for policy decisions, no published votes or meeting minutes, and no regularly scheduled press conferences. Interest rate or RRR moves and policy changes have been announced on weekends or Friday nights. One rate change even came out on Christmas Day 2010.

Mr Zhou has in the past downplayed communication as a tool, and last year spent months without making public comments even after a surprise yuan devaluation sent shockwaves through global markets.

This year, things have changed a bit, with more communication following calls for improved clarity from global policy makers including International Monetary Fund Managing Director Christine Lagarde.

"They've been trying to assuage worries that perhaps they're actually tightening policy," said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

"While there's a trend toward more messaging and communication, there's still quite some way to go. Unlike other central banks that can lay out their thinking, that's harder for the PBOC because the winds can shift if the leadership change their minds. The best they can do is explain the line of the moment."

Appearing with Ms Lagarde at a June IMF forum in Washington, Mr Zhou said it's difficult to stay "immune from the political reality" if a central bank has multiple objectives because doing so requires more coordination and joint efforts with other government agencies. Having a single policy objective is an "enviable arrangement," he said in a speech.

As for who actually sets monetary policy, nominally it's the domain of the State Council, China's equivalent to a cabinet. The NDRC, the government's top economic planning body, and the finance ministry have some input, as do other regulators with a seat at the advisory table. And overseeing all of that is the central leading group on financial and economic affairs, a Communist Party body headed by President Xi Jinping.

The tussle between such organs played out behind closed doors at the start of the year as policy makers began to debate their goals. The central bank wanted to keep the M2 growth target at 12 per cent for a second year, according to people familiar with the matter.

Other departments called for raising the goal to help boost growth. The latter path was later endorsed by the State Council, said the people who asked not to be identified because they aren't authorised to speak publicly on the matter. When the plans came out at the annual legislative gathering in March, the M2 objective was 13 per cent.

The PBOC didn't respond to a faxed request for comment on the M2 target change and policy making procedures. The NDRC didn't reply to a fax seeking comment on its deletion of interest rate remarks.

While it's normal for agencies to hold various opinions, recent airing of differences seems a step toward the transparency and independence that China's central bank needs in the future, according to Shen Jianguang, chief Asia economist for Mizuho Securities Asia Ltd in Hong Kong.

He expects the scale of monetary easing to be reduced in the second half, leading to increased downside risks for economic growth.

"As interest rates become more market-based, we need a more authoritative and independent central bank to decide and implement monetary policy," Mr Shen said.

BLOOMBERG