As governor of China’s central bank, Zhou Xiaochuan is uniquely placed to oversee a reform effort that has occupied much of his professional life.
Zhou’s role is anything but straightforward. He is under enormous international pressure to arrange a steady appreciation of the yuan versus the dollar, while at the same time preventing a spike in inflation in an economy expanding at dangerous rates.
In the three years since he’s been running the bank, Zhou has had to walk a political and financial tightrope. Yet, as a protege of China’s reformist premier Zhu Rongju, the soft-spoken economist is one of China’s bureaucratic elite, with the potential to rise high in the political hierarchy.
Calls for drastic appreciation of the yuan have not diminished since July 2005, when China replaced the yuan’s peg with a system allowing fluctuation against other currencies. Zhou has advocated more currency reform but insists China is on the right path.
“The central bank tries to prevent too much volatility, but basically the rate to a large extent is dependent on the supply-demand relationship in the foreign exchange market,” he told Emerging Markets in an interview earlier this year.
Revaluing the yuan is, of course, a matter of significant political and social sensitivity: China straddles a delicate line between urban and rural growth, and the demands of equitable income distribution between the prosperous coastal regions and the poor interior. A stronger yuan means cheaper agricultural imports, and China’s readiness for that prospect is still an open question.
Yet revaluing the yuan could also help reduce inflation almost evenly across the economy. China’s economy grew by its fastest rate in at least a decade in this year’s second quarter, expanding 11.3% year-on-year, up from the already high rate of 10.3% in the first quarter and driven largely by a surge in fixed-asset investment and lending.
In an attempt to put the brakes on credit growth and rein in an excessively large trade surplus, the central bank raised interest rates last month for a second time this year. While the supply of cheap money has helped finance an unwanted investment boom, Zhou has been caught between competing priorities in using interest rates as a policy tool. Rising rates could encourage speculative inflows and might impact banks’ bottom lines.
Cleaning up the country’s banking sector is one of his principal achievements. Zhou says he is no longer concerned that non-performing loans (NLPs) are building up in the banking sector. “Commercial banks also make a lot of money, profit, if they have provision. If the provision can cover the non-performing loans, it’s OK for the banks.”
“Especially for China, the credit market is not so mature, the market conditions are not yet so perfect, so a small percentage of new NPLs should be normal,” he says, emphasizing that the situation is “tolerable”. —Taimur Ahmad