A "very good economist and an experienced banker" is how colleagues both inside and outside the People's Bank of China (PBoC) describe Zhou Xiaochuan, who has presided over the central bank as governor for the past two years. The fact that they lay particular emphasis on Zhou's firm grasp of macroeconomics is significant, given the pivotal role he has had to play in shaping China's currency regime in addition to reforming the country's banking system.
A protege of China's reformist former premier Zhu Rongji (who also served for a while as governor of the Chinese central bank), Zhou is one of China's bureaucratic elite who has the potential to rise high in the political hierarchy, say those who know him. He has won his spurs the hard way by occupying a number of key positions at critical times, and he has acquitted himself well in the process, they add.
At the highest level
Over the past two years, Zhou has had to pick his way very carefully through a political as well as financial minefield. In terms of domestic politics, China could easily have been damned if it did liberalize its currency and damned if it did not, in terms of its international reputation. The fact that Beijing opted to make at least a token gesture which has quieted international clamour for the moment, is credited largely to Zhou's diplomacy.
Commentators like to stress that the decision in July to revalue the yuan by 2% and to shift the currency from a dollar peg to a currency-basket referenced regime was taken "at State Council level", with none other than Chinese president Hu Jintao and premier Wen Jiabao having the final say. But one PBoC source (quoted to Emerging Markets by a senior Japanese central banker) insists that Zhou played a very "persuasive role" in the decision.
It was a lonely road that the 57-year-old Zhou had to tread in the lead-up to that decision. There were pressures on him that the outside world was not always aware of, and people like Eisuke Sakakibara, who was for a number of years Japan's own chief currency diplomat, is among the few that appreciate those pressures. Anything more than a modest yuan appreciation could "hit Chinese agriculture very severely", says the former "Mr Yen".
That is a matter of extreme political and social sensitivity, he points out, in a country like China, which is desperately seeking to balance urban and rural growth and to distribute income more equitably between prosperous coastal regions and the still poor interior. A stronger yuan means cheaper agricultural imports, and China is not yet ready for that, says Sakakibara, who predicts that China cannot afford further moves on the currency for now.
Zhou's dilemma was compounded too by other factors, as he strove to respond to the increasing clamour from the Bush administration (which was pushed by protectionist trade and industry lobbies in the US) for a yuan revaluation, while coping with pressures from the agricultural sector to avoid cheaper food imports into China. There were strong arguments in favour of yuan revaluation, in order to supplement the controls over China's overheated economy.
The Chinese leadership had been forced to resort to "administrative controls", such as curbing runaway investment in sectors such as real estate, steel and cement production. But economists agree these are blunt measures that are easily circumvented. Likewise, raising interest rates is a blunt instrument that can hit more areas of economic activity than those targeted. Currency revaluation, on the other hand, helps reduce inflation more or less evenly across the economy.
Background
Zhou was perhaps uniquely well placed to understand the complexity of these factors. Having earned a doctorate in economics at China's prestigious Tsing Hua University (the alma mater also of President Hu Jiantao), he became assistant minister of foreign trade and was later appointed to the China Economic Restructuring Institute as acting deputy director. He also served as a director of the State Administration of Foreign Exchange before being appointed by Zhu Rongji to the state council leadership group on economic restructuring.
A background in economics would not have qualified Zhou for his present position, however, without a grounding in banking. He has "good experience in banking", one PBoC official noted. That is an understatement, given that Zhou served as vice-president of the Bank of China (one of the country's chief commercial banks) from 1991 to 1995 and as president of the China Construction Bank from 1998 to 2000. For good measure, Zhou also served for a time as chairman of the China Securities Regulatory Commission.
All this knowledge served Zhou well after his appointment as governor of the PBoC. In deciding on the most opportune time to liberalize China's foreign exchange regime (which will eventually mean relinquishing capital controls), Zhou had to move very carefully and deliberately, Paul Spence, the Bush administration's former point man on yuan negotiations with China, noted to Emerging Markets several months before Beijing moved.
Zhou had to be sure that the Chinese banking system, its foreign exchange markets, its capital markets and its administrative systems were able to cope with the potential loss, or at least diminution, of internal stability implied by the ending of the effectively fixed exchange rate regime which China had experienced for nearly a decade. Zhou needed to wear all of his hats (central banker, banker, securities regulator and public administrator) to carry off this act.
He also had to be a consummate diplomat. His manner and exterior help him in this respect. Those who encounter Zhou in person describe him as being undemonstrative or even "poker faced" – giving little away by his manner, which helps him as a negotiator. He also inspires trust. Zhou is a "very reliable man" in whom one can have "confidence", declared one East Asian central bank governor after meeting him for the first time.
Looking west
He is popular too in the West. In March, the board of directors of the Bank for International Settlements (BIS) announced that it was appointing Zhou as chairman of the BIS Asian Consultative Council. Zhou has lectured internationally on aspects of central banking and has argued that the demands placed on emerging market central banks are essentially different from those in the developed world. World Bank chief economist Francois Bouguignon for one has accepted that the Chinese model deserves further study.
But some in China accuse Zhou of being "too westernized", and he has to tread a careful path in order to remain credible inside as well as outside China. Bending to pressure from the West to liberalize the yuan regime could lead to another "Plaza Accord" or even another Asian financial crisis, argue some critics. Even Sakakibara warns China against being "dictated to" by the US and others into accepting a Plaza Accord-like formula, which led to a huge and damaging appreciation of the yen after 1995.
Zhou needs to be aware also that Asia's currency stability since the 1997 financial crisis has been founded partly upon the stability of the yuan. This is because trade between China and the rest of the East Asian region has grown exponentially over the past decade, and at the same time investment in China from Japan and elsewhere in the region has burgeoned. All of this requires a stable currency to underpin it. In this sense, the yuan has assumed the former role of the yen as Asia's reference currency.
Another major task lies before the PBoC governor, which is to clean up the estimated $290-400 billion on non-performing loans in the Chinese banking system. If he can do that, and also succeed in attaining international recognition for China's banks by getting at least one of the major ones listed in either the US or Hong Kong, further promotion could be open to him, insiders say. This could entail a vice-premiership – or even higher political office.