China Central Bank System vs U.S Fed

When China's top policy makers set out to streamline the country's 57-year-old central bank system six years ago, they chose the U.S. Federal Reserve as a model. The government appointed a six-member board of governors for the People's Bank of China and merged 30 provincial branches into nine regional offices. Similarities mostly end there. The Fed, led by Alan Greenspan, 78, has been independent since the Federal Reserve Act of 1913. The People's Bank, headed by Zhou Xiaochuan, 56, needs the approval of Prime Minister Wen Jiabao and seeks consensus from at least eight government bodies. Investors seeking clues about whether China will raise interest rates again after its surprise October increase may be better off reading tea leaves. As part of the government bureaucracy, the central bank, based in Beijing, can only advise Communist Party leaders, said Huang Yiping, the chief China economist at Citigroup's global markets unit in Hong Kong. "The central bank will not do anything to guide expectations," said Huang. "If it recommends that rates should increase, it doesn't mean they will." While the People's Bank may be gaining clout as China's economy expands, that will not necessarily spell more transparency, said Wei Yen, 53, an analyst at the ratings company Moody's Investors Service in Hong Kong. The bank's lack of independence, coupled with China's collective decision-making system, can make economic moves even harder to anticipate, he said. "There's not a lot of consensus in the bureaucracy and there isn't much clarity until a decision is made," Wei said. A further complication: China has no fixed system to report monthly data such as inflation and trade performance. The People's Bank, for example, gives no warning that it will release information about the country's monetary supply. Each month, usually between the 10th and the 15th, the news is posted on the bank's Web site or carried by state-run media like the Xinhua news service. China started reporting M2, the broadest measure of money supply, in 1998. When the People's Bank got the go-ahead to raise benchmark lending and deposit rates for the first time in nine years on Oct. 28, the news was posted on its Web site at 6:14 p.m. The notice did not say if bank officials had met that day. When the Fed raised the U.S. federal funds rate Dec. 14 for the sixth time since June, it issued a statement immediately after its announced meeting. "China's central bank doesn't have a regular sequence of meetings," said Nicholas Lardy, a senior fellow at the Institute for International Economics in Washington. "Nobody knows weeks in advance if there will be a particular move or when it will be announced." Changes decided by the Fed's open market committee mostly are expected because the U.S. central bank signals markets as a matter of policy, said Huang of Citigroup. By contrast, China's leaders aim to avoid expectations as they try to manage a command economy in transition to free-market capitalism, he said. 'China's economy is still developing and the entire system is under reform," Xiao Geng, an economics professor at the University of Hong Kong, said. "Stability is the objective." Under the People's Bank Law of 1995, national debate about fiscal changes start at the central bank's monetary policy committee, a 13-member consultative group. Only four current central bankers sit on the committee, which meets quarterly, according to the law. Other delegates include the chairmen of the banking, securities and insurance regulators; the National Bureau of Statistics commissioner, the deputy finance minister and the deputy director of the State Development and Reform Commission, China's top state planner. Yu Yongding, who heads an economic policy unit at the Chinese Academy of Social Sciences, is also a member. The committee must submit the outcome of its discussion to China's highest administrative body, the State Council, according to the law. Members include the prime minister, vice ministers and the heads of various ministries. Wen bears responsibility for all policy decisions under Communist Party of China tenets. As China changes, the People's Bank is becoming a more influential voice in the administration, said Victor Shih, a professor of politics at Northwestern University in Evanston, Illinois. The bank's Fed-inspired makeover in 1999 was designed to sideline powerful provincial authorities, Shih says. The central bank also has become more communicative under the governor, Zhou, adding detail to its quarterly reports on money supply, interest rates and treasuries, Jonathan Anderson, the chief Asia-Pacific economist at UBS in Hong Kong, said. Governors now speak more openly about possible policy changes, he said. The signals are not always clear. The People's Bank deputy governor, Li Ruogu, said in the state-run Financial News newspaper Dec. 28 that China needed more time to evaluate the effect of interest-rate increases before deciding on any further moves. Seven days later, Zhou said the central bank should "fully take advantage" of interest rates to cap M2 growth at 15 percent this year, according to a statement posted on the bank's Web site. Zhou declined to be interviewed for this article. "A lot of what they're thinking about right now is how to telegraph to the market that everything is under control," said Marshall Mays, a director of Emerging Alpha Asset Management in Hong Kong.