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China Needs a Grown-Up Central Bank

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Zhou Xiaochuan is governor of the People's Bank of China. But among some financial types, he's earning another, less enviable title: the killer of weekends.

On May 10, Zhou announced a surprise interest rate cut, forcing anyone with a stake in the Chinese economy to put a premature end to what had likely otherwise been a day off. Even worse, the move leaked hours earlier on social media, adding to what Deutsche Bank calls an unnecessary "atmosphere of alarm" in the global economy. It was just the latest example of the PBOC's penchant for making surprise moves on Friday, Saturday or Sunday evenings -- or, in one instance in 2010, on Christmas Day -- with zero warning and little explanation.

All this raises a troubling question: Is China's central bank up for the responsibility of helping steer the world's second biggest economy? The available evidence suggests the answer is no.

There are two main problems with the PBOC's erratic behavior. First, it erodes the effectiveness of Zhou's policies. On May 11, the first trading day after the PBOC said it was trimming its one-year lending rate by 25 basis points to 5.1 percent, financial markets gyrated. After scouring for details from an array of media, traders simply had no idea what Zhou was trying to accomplish. Had the PBOC provided deeper insight into where it wanted to guide borrowing costs, and why, financial markets might have worked in tandem.

“The resulting confusion and asymmetry in information flows are not in PBOC’s interest," Angela Beibei Bao, an analyst at New York research firm Rhodium Group, told Bloomberg News.

Second, Beijing's impetuousness impairs any hope it has of playing a leadership role in the global financial system. No serious observer expects the PBOC to mimic the Federal Reserve or European Central Bank. But, as China's clout in the international economy rises, it  has a responsibility to adopt a decision-making style that avoids spooking markets.

Take China's push to transform the yuan into one of the world's five main reserve currencies. Zhou has been lobbying the International Monetary Fund to add the yuan to its Special Drawing Rights system along with the dollar, euro, yen and British pound. That goal is sensible given Beijing's status as the biggest holder of currency reserves ($3.7 trillion). But, given the country's propensity for springing monetary surprises, the IMF is unlikely to grant recognition to China as a "safe haven" from global risks.

It doesn't help that China has also earned a reputation for lacking financial transparency. The International Monetary Fund, Standard & Poor's and McKinsey have gotten accustomed to working around the questionable debt figures regularly issued by the Chinese government. But hardly anyone feels comfortable estimating the size of China's shadow-banking industry and gold reserves. (Beijing treats the latter as a state secret.)

Zhou has been making efforts to reform the Chinese system. In 2013, he began publishing data on the bank's liquidity-management efforts. More recently, the PBOC has issued occasional statements to the public, though they tend to elaborate on the meaning of the bank's mandate -- not what efforts Zhou is organizing to meet it.

There are some concrete steps the PBOC could take to further improve its reputation, beginning with the creation of  a reliable system for communicating policy changes. Although it's not officially a Group of Seven power, it should begin scheduling regular rate-decision dates -- and Zhou should consider making public statements on policy shifts -- like the world's other major economies.

It would be better, of course, if the Communist Party gave the PBOC the independence it needs to make difficult policy decisions. Right now, Zhou and his team take instructions from Beijing's State Council, which has a track record of censoring the media. "As China steadily opens up its economy to the world, external risks are likely to grow," says Simon Grose-Hodge, Singapore-based investment strategist at LGT Group. "The PBOC will require a free hand to make the unpopular, but necessary decisions politicians all too often defer or avoid altogether."

Unfortunately, that's a nonstarter in President Xi Jinping's China. The PBOC's problems with transparency are an unfortunate offshoot of Beijing's broader obsession with secrecy. So for all the talk of China becoming a mature global power, the country seems destined, in the immediate future, to remain a financial black box -- one where investors will still be obliged to constantly check their BlackBerrys on the weekends. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net