STAFF NEWS & ANALYSIS
China Builds Great Central Bankers?
By Staff News & Analysis - April 03, 2013

The Trillion-Dollar Bureaucrat … He may be the most important central banker in the world. But is China's Zhou Xiaochuan really in charge? The longest-serving leader of a central bank of a major world economy is not to be found in Europe, or North America, or Japan. It is a 65-year-old man named Zhou Xiaochuan who was recently reappointed to the job he has already held for a decade, namely governor of the People's Bank of China (PBOC). The surprise reappointment gives him a chance to finish the immense task on which he has labored for his adult life: no less than creating a modern financial system that can power China's booming economy forward without the crises, bubbles, and busts that have become all-too-regular features. And while he's at it, he will try to make the Chinese currency, the renminbi, as central to global commerce as the dollar is now and the pound was a century ago. – Foreign Policy

Dominant Social Theme: The Chinese have it right when it comes to economic stimulation.

Free-Market Analysis: Around the world, Western-style monetary recipes are failing. But this article attempts to convince us that the Chinese have somehow managed to implement miraculous growth using ingredients that are notably dysfunctional elsewhere.

How is that possible? We would submit it is not. What is going on is a kind of campaign to convince people that as capital and power flow east, such a reality is reasonable and inevitable. Seen from this standpoint, the profile of this Chinese central banking genius – and it drones on and on – is part and parcel of a larger attempt at explaining the inexplicable.

We are being instructed that the East, inscrutable and "cool," is better at perfecting a monetary recipe that has soured drastically in the West. There is no doubt this is what is what we are supposed to internalize. Here is more from the article:

Zhou's tenure at the PBOC has coincided nicely with China's emergence as an economic power. When he took the helm of the central bank in 2002, China produced $1,135 worth of goods and services per person, in present-day dollars. By 2011, that figure had reached $5,445. Behind those numbers were hundreds of millions of people who could suddenly feed themselves reliably, endure less backbreaking work, and enjoy more of the comforts of the modern age than their parents' generation could have imagined. China passed Japan to become the world's second largest economy in 2010; it will almost certainly become the world's largest within a generation.

The work of the country's central bank, led by Zhou, has been a crucial if often overlooked part of that story, as it has helped maintain steady growth in a nation buffeted by global forces. But he has had less success in creating a financial system that can lay the ground for the next generation of growth, one in which capital flows to the businesses and projects that have the best prospects, not the best political connections. To maintain China's breakneck growth, Zhou and his successors must wrest power and influence away from the country's political leaders to build a financial system that takes full advantage of all the lessons Western central bankers have learned over the centuries. Yet they must ensure that the system they build suits a Chinese culture and economy that are quite different from those of the United States and Western Europe …

Zhou's term as governor for the PBOC was set to expire in December 2012, after a decade in office. China economy watchers spent the better part of the year trying to read the tea leaves as to whether he would enjoy a comfortable retirement or be promoted to a higher office in the new government coming in, with the conventional wisdom on this question going back and forth several times over the course of the year. The answer turned out to be "neither." The new government of Xi Jinping instead elected to leave him in place, choosing continuity in an institution that is crucial to the future of finance in a country of 1.3 billion people. In his first decade as governor, Zhou shaped the course of modern China, despite limited authority. He helped avert a deep economic downturn. He helped persuade his political overlords to reverse easy money policies as a bank lending bubble emerged. He made great strides in encouraging the development of China's financial markets and the freer flow of capital across his country's borders. At a time when the Western economies were flailing, their entire philosophical underpinnings coming into question, China was an unlikely source of strength for the global economy. And that success, at least through 2012, was vindication for Zhou and his band of haigui technocrats.

We just don't believe any of this hagiography … least of all that Zhou has "led" China through anything that will conclude on a positive note. The country is dotted with empty cities and hollow skyscrapers. People have few investment options and thus have put their money in empty apartments to the point where Chinese officials are now beginning to ban such investments.

On every level, when you look at China you see price fixing, corruption and vast inflationary money flows. This is not to denigrate the Chinese "miracle" – only to say that the same monetary tools used in the West have been applied in the East. And there is no reason to think over the long term they will have any better result.

China's miraculous growth surely resulted from a central bank policy of easy money buttressed by intensive Western investment. Please bear in mind that what has resulted in increasing catastrophe – joblessness and currency degradation – will not provide immunity in the East.

After Thoughts

Why do we expect a different result?

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