Oct. 12 (Bloomberg) -- China's next central-bank governor may fare no better than incumbent Zhou Xiaochuan in cooling the world's fastest-growing major economy.

Zhou, who has been in office five years, is likely to be given a new job after next week's Communist Party congress, economists predict. Whenever he leaves, his successor will inherit a monetary policy blunted by an undervalued currency, a jump in foreign investment and surging stocks. The People's Bank of China is also constrained by a lack of independence.

Zhou's five interest-rate increases this year didn't stop the economy from expanding 11.9 percent in the second quarter, the most in more than a decade. Money supply is surging because the government wants to hold down the yuan, forcing the central bank to sell the currency and pump cash into the banking system. Some of that money is finding its way into stocks, pushing the benchmark CSI 300 Index up almost 200 percent this year.

``There is a very large challenge facing the next central- bank governor,'' said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington and author of at least six books on China's economy and government. ``The problems are massive.''

Zhou is 59 and China has a mandatory retirement age of 65, suggesting an imminent exit if the government wants him for a five-year term in another senior job. Zhou's predecessor, Dai Xianglong, served almost five years, and his departure was announced six weeks after the last congress in 2002.

Pressure on Yuan

``High up, a decision was made that he may be more suitable in another role,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. The central bank declined to comment.

Zhou presided over the first change in currency policy in a decade, ending the yuan's peg to the dollar and revaluing it by 2.1 percent in 2005. The change was partly a response to major trading partners, including the U.S., where politicians assert the currency is being kept artificially low to boost exports.

He probably sought a revaluation of 5 percent, according to Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. Other officials likely argued for a smaller change because of the risk of making exports less competitive.

The yuan was little changed at 7.5078 versus the dollar as of 3:20 p.m. in Shanghai. Since the revaluation, China's currency has gained a further 8.1 percent against the dollar. It has fallen 7.4 percent versus the euro in the same period.

The CSI 300 stock index fell by the most in a month today on speculation that the central bank will raise rates.

Financial Decisions

``At the end of the day, it doesn't matter who is China's central banker because all financial decisions are made at the premier and vice-premier level,'' said Beijing-based lawyer Guan Anping, a former trade ministry official and legal aide to Vice Premier Wu Yi, who oversees China's financial industry.

China's net exports accounted for 7.3 percent of gross domestic product last year, up from 5.5 percent in 2005. The trade surplus for the first nine months jumped 69 percent to $185.65 billion, topping the $177.5 billion record for all of last year, according to government data released today.

While Zhou has raised the benchmark rate to 7.29 percent and ordered banks to set aside larger reserves to cool inflation and asset bubbles, his room to maneuver is constrained. Whoever follows him must contend with the managed currency, the mix of a free and planned economy, price controls and the lack of a developed bond market, analysts said.

Greenspan's Concern

``Unless the Chinese allow the exchange rate to go up, I'm worried about the stability of the economic system,'' former Federal Reserve Chairman Alan Greenspan said in a speech in London on Oct. 2. ``The exchange rate will create more economic problems than they know.''

The country's money supply expanded more than 18 percent in August and consumer prices rose 6.5 percent from a year earlier, the most in a decade. Spending on property and factories is predicted by the central bank to rise as much as 26 percent this year.

``There is a tremendous amount of wealth creation in the market which is creating liquidity and undermining rate rises,'' said Alec Young, an international-equity strategist at Standard & Poor's in New York.

Two possible candidates to replace Zhou are Guo Shuqing, 51, chairman of China Construction Bank Corp., and Shang Fulin, 55, chairman of the China Securities Regulatory Commission, economists say.

Guo, who oversaw the initial public offering of China's second-largest lender, has served as vice governor of the central bank and director of the nation's foreign-exchange regulator. Shang, too, is a former vice governor of the central bank and as the securities regulator since 2002 implemented the biggest ownership shake-up in the history of China's stock market as state companies made shares tradable.

To contact the reporters on this story: Simon Kennedy in New York at skennedy4@bloomberg.netPaul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

Last Updated: October 12, 2007 05:32 EDT