The Strategist

5 biggest challenges for the new head of the Central Bank of China

11/27/2017 - 11:50

The long reign of Zhou Xiaochuan as head of the National Bank of China is coming to an end. In January 2018 he turns 70 years old, and so he announced his forthcoming retirement in the last month. Zhou has been ruling the central bank of China from the first days of the "Chinese economic miracle" in 2002 and successfully - due to large-scale stimulation of lending - led the Chinese economy through the 2008 crisis.

Ever since, he has maintained a terrible credit bubble in China, warning at a recent party congress about the danger of the "Minsky moment".

However, as noted by Bloomberg, the successor to Zhou will certainly face a number of serious problems associated with a huge debt of 300% of GDP.

Not only the next head of the NBC will have to restrain the growth of debt, not allowing the economic growth to collapse, but also to monitor acceleration of inflation, given that the role of the institution in this complex regulatory structure is increasing. It will also be necessary to maintain a stable currency, as it will be available to market forces and will be able to maintain the necessary level of communication to keep global investors informed.

"The NBC is tied to its monetary policy: it's enough to simply look at inflation and the goals of economic growth in the past." The central bank must find a balance between goals, some of which contradict each other," said Zhao Yang, chief Chinese economist at Nomura Holdings Inc.

Bloomberg presented "the five most pressing tasks", with which Zhou’s successor will have to cope and which will have to be addressed from the first day.

Financial sector

If the financial sector with a volume of $ 40 trillion is a time bomb, then it is the head of the NBK who will have to think carefully about which postings to cut.

Cutting risky interbank lending, reducing risky behavior on the part of asset managers and attracting Internet lending are key challenges against attempts to prevent real economy financing from failures.

The central bank should also find a place in the new regulatory structure for the bodies responsible for oversight. At the same time, we should not forget about the ticking clock mechanism of the delayed-action bomb against the backdrop of the fact that the financial sector faces further shocks now that the authorities have relaxed a number of restrictions on foreign ownership.

Policy structure

The way of interaction between the NBC and the markets is changing in order to achieve the nominal goals of the policy, namely, maintaining the stability of the currency and thereby promoting economic growth. After the credit estimates of the era of the planned economy, when the focus was on the amount of money in the system, the central bank is moving to allowing short-term interest rates to establish the value of money.

With Zhou, the NBC has developed many tools for managing market rates, but now it is trying to focus on only two factors, in fact increasing the range of maturities.

Rationalization of the policy framework is the key task for the new head of the NBC, especially since the central bank has already announced that it is moving to a two pillar system that combines interest rate policies with instruments designed to regulate the prices of financial assets.

Relationship with markets

Of all the central banks of the world, the NBC makes fewer statements than others.

However, there are signs that this year the central bank wants to better present itself to the markets to trigger more comments.

Currency management

Managing China's massive inflows and outflows and their impact on the yuan complicates the NBC's efforts to regulate the volume and price of liquidity in the market. This is a task of which they would be happy to get rid, and the head of the NBK will have to solve this issue on the way to the freely floating exchange rate of the yuan.

A move in this direction can help achieve another big goal for Beijing: intensifying the global use of the renminbi. Despite the fact that the IMF granted the renminbi the status of reserve currency in the last year, the share of payments in this currency in the world fell from a peak of 2.79% in August 2015.


With the enormous challenges that the NBC is facing, it is easy to forget about its mandate on inflation. After a devastating episode of rampant inflation in the 1990s, Zhou’s successor should closely monitor how things unfold.

The growth of consumer prices for food and fuel was the fastest since 2011 in October. This clearly indicates that the cost price will also start to grow. The government's desire to reduce pollution can trigger an increase in inflation, which makes policy tightening unthinkable.

Despite the fact that the PBC should receive instructions from the State Council of China on major policy issues, the head of the PRC can always use his knowledge and experience to manage the debate on central bank policy, said Shuang Ding, chief economist of Greater China & North Asia in Standard Chartered Bank Ltd.