In its quarterly report, the People’s Bank of China questioned the merits of transparency, saying too much openness could lead to “pressure from various sides.”
Such a stance and its unscheduled policy moves come as Governor Zhou Xiaochuan and Premier Li Keqiang loosen barriers to money flows and seek to establish the yuan as an international currency. For global investors, greater access to the world’s No. 2 economy is poised to come with more exposure to a monetary policy regime that’s ever-more unpredictable, raising the question: Is the PBOC ready for prime time?
Information about the Communist leadership’s clean-up of local-government debt has eked out in anonymously sourced press reports. The latest interest-rate move came late on a Sunday afternoon, hours after a leaked or faked — not clear which — statement circulated on China’s version of WhatsApp.
The PBOC’s unscheduled weekend announcements create an “atmosphere of alarm,” says Deutsche Bank AG. The consequences aren’t just poor atmospherics and inconvenience: the lack of clear communication at a time of increased policy complexity also erodes its effectiveness.
“The transparency is not satisfactory, for both open-market operations and longer-term maneuvering,” said Angela Beibei Bao, an analyst at Rhodium Group, a research firm in New York. “The resulting confusion and asymmetry in information flows are not in PBOC’s interest. At certain times of the week everybody is guessing what the PBOC would do. Will they conduct reverse repo? Will they lower interest rates?”
While the PBOC has made some steps to boost transparency, including Q&A statements accompanying decisions, much of its critical work goes without public confirmation. The PBOC didn’t respond to a fax seeking comment on its transparency.
After years of relying on guidance to state-owned lenders on how much credit to allocate to state-run enterprises, and on targets for the quantity of money in the financial system, China’s central bank is shifting to an interest-rate based policy framework.
While clarity on the outlook for borrowing costs would be a boon, especially to private-sector companies for investment planning, the PBOC is hampered in part because of limits to its power. Lacking the degree of independence enjoyed by foreign peers, the PBOC advises on policy, manages money market operations, and takes instruction on policy moves from the State Council, the nation’s cabinet.
Such a set-up has the advantages of close policy coordination with the rest of the government — something apparent in the PBOC’s role in helping sort through the local-government debt mess — though it adds a hurdle to the PBOC’s communication challenges.
“It’s unrealistic to expect the PBOC will act like the Fed or ECB” because China’s monetary policy decision-making mechanism is about seeking consensus in the cabinet, said Zhang Bin, an economist with the Chinese Academy of Social Sciences, a research agency that advises the government. “Other powerful ministries from the Ministry of Finance to the Ministry of Commerce will have influence on the process.”
The annual money supply target, interest rate and exchange rate decisions must be approved by the State Council.
The picture has become further complicated by a raft of new facilities established by the PBOC to inject liquidity to targeted parts of the economy. Details on some — and even confirmation of their existence — have come only after weeks or months of delay.
Meantime, announcements on changes to required reserve ratios and lending and deposit rates come without official warning. In the past six months, PBOC policy releases came on Friday, Saturday, Sunday and Wednesday evenings.
Releases outside of market hours do offer observers time to digest the information before Chinese financial markets open. And, unlike peers in other major economies in recent years, Chinese policy makers have been crisis-free in managing their financial system.
Even so, weakening growth means more evening PBOC announcements may be in store. President Xi Jinping and his Communist Party Politburo colleagues have pledged to step up measures to counter downward pressure on the economy. There’s plenty of conventional easing still open to the PBOC, with the one-year lending rate at 5.1 percent and the required reserve ratio of 18.5 percent.
Counterparts in the U.S. and Europe had to resort to asset purchases as their main tools after their benchmark rates approached zero. In the process, central bankers honed forward guidance to shape expectations.
Such transparency has yet to arrive in China.
“Too much information will probably turn into noise,” the PBOC said in its quarterly monetary policy report released on May 8. “If decision-making details are released, it may help transparency”, but “it may bring decision-makers to yield to pressure from various sides.”
Noise was found in abundance on the Internet on May 10, however, two and a half hours before the PBOC announced its rate cut and deposit-ceiling changes. That’s when a statement foreshadowing the decision began circulating on WeChat, a popular messaging app.
“It is a concern for me that such market-sensitive information appears to be known by a group of people first,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong. “One reason is perhaps that multiple government bodies have a say or are informed of the decision first. It would have been better for PBOC to be more independent in such decision making and release the information to banks and the public at the same time.”
Surprise announcements and suspicion of unauthorized leaks aren’t unique to China. The U.S. Department of Justice is among the authorities investigating a leak of confidential monetary policy information at the Federal Reserve in 2012, and the Reserve Bank of Australia has recently investigated currency moves ahead of rate decisions. Switzerland and Singapore are among those whose central banks have sprung unexpected policy changes on markets this year.
In one area, the PBOC has been clear in forward guidance — the exchange rate. With the International Monetary Fund assessing the yuan’s readiness for inclusion into its basket of official reserve currencies later this year, the PBOC has declared there’ll be no major swings.
The PBOC has improved disclosure in some areas. It has started to provide monthly reports on its liquidity tool operations, starting from last month, and the chief economist of the PBOC’s research bureau, Ma Jun, has begun sending journalists commentary on the economy and policy explainers.
It has also taken to social media. When China and Russia agreed a three year currency-swap line of 150 billion yuan last year, the PBOC used the local equivalent of Twitter to explain to the public how it would work.
“Relatively speaking, the PBOC is transparent compared to other Chinese ministries,” said CASS’s Zhang.
But when it comes to liquidity injections or debt-restructuring, investors are left scouring for details from an array of media, while major policy moves can drop at any hour, any day, including Christmas — as it did in 2010.
“Opacity was acceptable in a predominantly state-run financial system with state-owned banks lending to state-owned companies,” Michael Spencer, chief Asia Pacific economist at Deutsche Bank in Hong Kong, wrote in a report this month. “In an increasingly market-based economy with a burgeoning private sector demanding access to financial resources, this level of confusion can be damaging to investment.”