China Extending Zhou Stay Seen as Aid to Financial Overhaul

China’s plans to make its financial system more market-based and expand the yuan’s role as a global currency are incentives to extend the tenure of the nation’s longest-serving central bank governor, analysts said.

Zhou Xiaochuan, who turned 65 last month, will probably become a vice chairman of parliament’s top advisory body, an appointment that exempts him from mandatory retirement, Reuters reported yesterday, citing two people with party-leadership ties and two people in the financial industry who weren’t identified. Zhou will remain governor for an indefinite time to help enact changes including easing restraints on the yuan, Reuters said.

Under Zhou, China ended a decade-old currency peg to the dollar, expanded the bond market and gave banks more freedom to set lending and deposit rates. With a new government leadership set to take office next month, retaining Zhou would provide stability at a time when the People’s Bank of China is grappling with rising risks from shadow banking and changing how it conducts monetary policy.

“With a wealth of experience, Governor Zhou is a well-seasoned policy maker who can help push forward China’s financial sector reform,” said Liu Li-Gang, head of Greater China economics for Australia & New Zealand Banking Group Ltd. in Hong Kong, who previously worked for the World Bank. “His stay will provide policy continuity, consistency, and confidence to China’s financial system.”

An official with the PBOC’s news department, who asked not to be identified because of the institution’s rules, said the central bank won’t comment on the Reuters report.

Member List

The Communist Party’s omission of Zhou from its new 205-member Central Committee in November and a Feb. 2 profile by the official China Securities Journal that said he’d step down in March had signaled the governor, who took office in 2002, would leave as part of a once-a-decade leadership change.

Zhou understands global markets and has contacts among the world’s financial leaders, said David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department, now an analyst in Los Angeles at TCW Group Inc., which oversees about $138 billion.

“He represents the country well,” said Chen Zhiwu, a finance professor at Yale University in New Haven, Connecticut, and former adviser to China’s State Council. “My understanding is that they want to keep him on so that others can have more time to gain experience on the international stage.”

Credit Expansion

Zhou must confront an expansion in credit outside the banking system that includes less-regulated products such as trust loans. Aggregate financing, an indicator started by the PBOC in 2011 to gauge funding in the economy, rose 160 percent to a record 2.54 trillion yuan ($407 billion) in January from a year earlier while new local-currency loans increased 45 percent.

“Zhou faces a rising risk in the financial system,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong. “He needs to draw a fine line among growth, inflation, risk and restructuring.”

China’s economic expansion is set to accelerate for a second straight quarter after an almost two-year slowdown, based on the median forecast of analysts surveyed by Bloomberg News. In its quarterly monetary policy report released Dec. 28, the PBOC highlighted the need to control risks as an objective, a possible sign of growing concern that a surge in non-bank lending will lead to defaults.

Zhou led the central bank during the global financial crisis and oversaw exchange-rate reforms in July 2005 that paved the way for the yuan to rise about 25 percent against the U.S. dollar. The PBOC has also loosened controls over the yuan’s use for international trade and investment purposes.

Daily Tool

Last month the central bank said it would start daily short-term liquidity operations as an additional tool to manage the supply of cash. That may presage the adoption of a new, market-based benchmark interest rate, according to Standard Chartered Plc.

Next month’s annual meeting of China’s legislature will see officials complete a transition that began with Xi Jinping replacing Hu Jintao as head of the Communist Party in November. It put Xi in line to also take over from Hu as president. Li Keqiang, who became the party’s second-highest official, is set to replace Wen Jiabao as premier.

Xiao Gang, chairman of Bank of China Ltd., will be appointed PBOC party secretary, setting him up to succeed Zhou eventually, Reuters reported. Other potential candidates include Shang Fulin, the nation’s banking regulator, and Guo Shuqing, head of the securities regulator.

Capital Controls

The governor in December spoke of limits on reform, saying China will keep controls on short-term capital flows even if it implements deeper convertibility of the yuan. The PBOC doesn’t have the political independence of counterparts such as the U.S. Federal Reserve, meaning senior officials above Zhou must approve major decisions.

“There will be many difficulties and risks ahead, so a veteran and well-respected central banker to steer the cause could be a huge plus,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in a telephone interview.

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