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Business News/ News / Xi Wants a PBOC That Looks a Lot Like the Fed

Xi Wants a PBOC That Looks a Lot Like the Fed

Imitation is the sincerest form of flattery. And smart statecraft.

Xi Wants a PBOC That Looks a Lot Like the FedPremium
Xi Wants a PBOC That Looks a Lot Like the Fed

(Bloomberg Opinion) -- Great powers need formidable central banks and remarks from Xi Jinping suggest he considers China’s financial machinery is not quite up to scratch. The president sounds like he's looking to give the People's Bank of China some of the tools that will allow it to more closely resemble the Federal Reserve. The question is, which Fed?

Xi has done much to consolidate power in his office and enhance the already giant footprint of the central government. So it's unlikely that he wants the PBOC to set borrowing costs independently and release reams of projections — and sometimes jarring commentary — into the public domain, some of which may be contrary to the ruling Communist Party’s message. Nor is Beijing likely to look favorably on a decision-making process that allows for some vocal opposition on key decisions, as has often happened on the Federal Open Market Committee. No way that flies in China. 

There's more to policy than nudging an interest rate around by a quarter point or 50 basis points as the Fed, the European Central Bank and Bank of England typically do. Economic slumps, or the prospect of deflation, can trigger massive purchases of bonds known as quantitative easing. The Fed and its cohort went down this route after the meltdown of 2007-2009, and in response to the collapse in growth during the pandemic's early stages. Japan is an old hand at the practice. China has eschewed this approach despite a disappointing recovery.  

The prospect that might be about to change caused brief excitement among traders in March when a previously unreleased portion from a Xi speech in October became public. The cause for the short-lived elation: Xi's cryptic comments that the PBOC should increase the buying and selling of bonds in its open-market operations, something commonplace among central banks but more rare in China.

The remarks were initially interpreted to mean China might be about to engage in its own form of QE. That's probably wide of the mark. The authority is rightly criticized for its reluctance to be more assertive in providing stimulus. This month, the bank again passed on juicing the economy. The PBOC's main rate, at 2.5%, provides plenty of room for reductions — should Beijing choose to. Besides, Xi mentioned the acquisition and sale of bonds. QE involves only the former. 

The leader was perhaps expressing a desire for technical changes to how the PBOC goes about its daily business, according to David Qu and Chang Shu of Bloomberg Economics. The trading of treasury bonds is a normal part of managing liquidity for most central banks, they wrote in a report, though not used in China for about two decades. The bank has preferred to use reserve requirements — the level of funds banks must set aside — and more short-to-medium term securities. Viewed from a perspective of fine-tuning, this would mean being less of an outlier. (The finance ministry backed Xi’s call for more bond transactions, according to an article in the People’s Daily on Tuesday.) 

To what end? Fully developed market operations, including the use of long-term bonds, wouldn't just make it look more like a modern monetary authority, it would help the PBOC drive a sense of national purpose in China. One of the hallmarks of central banks is their ability to bankroll and assist national financing in challenging times. Right now, the important global reserve isn't a commodity like gold, silver or bronze. That lodestar is the US Treasury note. The wellspring of demand is, at least partly, a byproduct of having an advanced central bank, namely the Fed, one of whose purposes was to forge liquid national markets out of a rudimentary system that belied — and constrained — the country's industrial power. Those deep capital markets have enabled the US to be the global lender of last resort and make the dollar indispensable. 

Possession of this singular reserve asset and a commitment to broadly maintain its value, via an inflation targeting central bank, gives the US a real edge. China doesn't have anything that comes close: Even its much-publicized expansion of lending to emerging markets is mostly done in dollars. An important function of the state, at various times in history, is to raise emergency finance, Joshua R. Hendrickson, a professor at the University of Mississippi, said in a paper last month. What he calls “the Treasury Standard," which followed the Bretton Woods system of fixed-exchange rates, gives the US the ability to engage in unprecedented levels of fund raising in times of crisis. This can be a mixed blessing. 

The standard’s “continued existence is in the interest of the US government and its foreign policy," Hendrickson wrote. “I would expect the US to take steps to maintain the status quo, even in ways that might otherwise be unexpected." A challenge to the system’s continued existence “is an inherent fragility...caused by the fact that the global reserve asset is a debt instrument of the US."

Just because Xi wants a muscular central bank doesn't mean he's anticipating upheaval, much less bracing for a fight. But a lender of last resort that’s ready for prime time is a vital part of statecraft, one where the US has a clear lead. The Chinese president’s aspirations are entirely understandable. Let’s get ready for a Fed with Chinese characteristics. 

More From Bloomberg Opinion: 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.

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Published: 24 Apr 2024, 01:05 AM IST
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