By Wei Gu
March 16, 2010

The signals coming from Beijing about the yuan have been mixed. Who should investors listen to? Whoever ranks highest in the party. That’s not the central bank.
Western economists like the People’s Bank of China, in part because many of its officials are trained in conventional monetary economics. But inside the government’s complex hierarchy, the situation is quite different.
In the official list of the 28 ministries which sit under the State Council, the PBOC is ranked 27th, just after the National Population and Family Planning Commission and ahead only of the National Audit Office. The central bank is four seats behind the pro-export, anti-currency appreciation Commerce Ministry. And there are reasons to believe that even the State Council is not the final authority for a decision as significant as de-pegging the yuan. That will be made by the Communist Party’s nine-member Politburo Standing Committee.
Investors should listen closely to Premier Wen Jiabao, head of the State Council and member of the Politburo Standing Committee. Wen said on March 14 that he doesn’t believe the yuan is undervalued and called U.S. demands to revalue protectionist. He vowed Beijing will steer its own way on currency reform.
The top party leaders probably haven’t heard of the Balassa-Samuelson effect, which explains that currencies rise as countries get richer. In fact they are more inclined to believe that yen’s sharp appreciation after the Plaza Accord is the culprit for two decades of slow Japanese growth.
The PBOC may be equally powerless when it comes to the policy interest rate. Some say that higher authorities actually make the call. But really, in a country where capital can’t move fast, the price of the money doesn’t matter much.
The central bank does set loan quotas for banks and gives them advice on who should get loans. But even on these matters it shares that power with the banking regulator. As the Chinese economy evolves, the central bank may become more important. For now, though, it is largely, in Chairman Mao’s phrase, a paper tiger.


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Well said, that is the reality of China’s political, and for the matter discussing here, the economical systems, called it whatever system with Chinese characteristics if you well. That is something missed by the most west, if you want to play with China, it is always true that you need to take China’s uniqueness into consideration, especially in nowadays when China is feeling much self-confidence in its dealing with the world. Call it the way of handling international issues with Chinese characteristics, if you will.

Posted by Beijiner | Report as abusive

China is indulging in a beggar-thy-neighbor policy by means of its exchange rate. And it is doing so because of internal Domestic Policy.

It has successfully brought a great deal of its population up on to the Economic Escalator to a middle-class existence. Which is a remarkable feat in only 20 years since it embarked upon that quest in the early 1990s.

But in doing so, it has created Great Angst about the “Other Half” of its population (and when I write population I mean POPULATION). This rural component of China’s demography has seen nothing like the enhancement in lifestyle that its urban counterpart has enjoyed. All they can count on is the (illegal) sending off of an offspring to the city to find (hopefully) work and thereby support the family back in some rural community.

There is subsequently considerable Pent-up Demand for an improvement in their lifestyle — which is always a dangerous social attribute in any country. But, perhaps, more so in China than elsewhere, since it has come so far in so little time.

I suggest that the Politburo — never very courageous people — are Scared Silly that growth will slow before they can complete the General Restructuring of China from the General Mess it was in before Deng Xiaoping came to power in 1980s. And they have a way to go.

They will do all in their power to keep the status quo in terms of the Chinese Economic Miracle. As for “Democracy”? Well, first it would have to be introduced into the Chinese dictionary of common language usage. Let’s not count on that either any time soon.

Posted by deLafayette | Report as abusive

It is the habit of US lawmakers to blame a foreign country for domestic woes in tough times.

All this does is blind us to the causes of the current crisis and thus delay meaningful reforms.

Global competitiveness requires a parity in labor costs, not currency. GM in China was making profits while GM north America needed bailouts.

The problem of US labor costs, is one that nobody, particularly our elected officials are brave enough to face, not to mention fix.

Posted by GRJensen | Report as abusive

Dear writer,
Your writings on China! recent past and present banking systems, methods of loans to industries and to small enterprises and so on are very praise worthy to note,to grasp and fine for world economists,social and economic policy makers and to policy makers.
You and other journalists, mainly from American economists, and from government are stressing the importance of valuing her currency appreciations to their tastes and preferences and to be suited to their self interests.
Now, we knew very well and happy to note that her standing in exports,foreign exchanges, more and more finished products, more and more foreign capitals, and mad rush by world famous industries are opening,establishing and strengthening their productions by cheap rates of labor,less transport costs and her dedicated workers to work for longer hours compared to other developed nations and all these recent,steady growth and entering into entire world economic and social scenes are talk of the town and have a clear,clean and attractive eyes to all.
One thing, i want to tell you, as a head of state, and almost and all things are in state controls, public approval, strict discipline work force, more national spirits had made China stands on her own feet and more practically speaking, they are not in other mans shoes and so on.
Then,why, she has to increase her currency level and getting some directions and from some indirect instructions from America to set right their currencies level with other world nations.
i think time has to talk of her currency levels and ask her to increase the value of her currency from number of times.
When actual time comes either by directly or indirectly, and more world pressures, then, China has to rethink their policies and to be implemented in some drastic changing levels to suits to world interests.
That indirect compelling situations will take some more months/years to come to world acceptance levels.
Many western countries are entitled to have own dreams or own say about China!s present currency low level compared to other nations.
No body correctly think, what happened to her interests,aims and objectivities at compulsion mechanism.

Posted by mdspatsy | Report as abusive

[…] Views’ Wei Gu has a must-read piece out examining who controls the currency. Tip: it’s not the People’s Bank of China, […]

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[…] Yuan fate in hands of party, not PBOC – Breaking views […]

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Is this recognizing the effects of fractional banking and moving closer to the Chinese model of regulation (consider the total effects on the country not just the profits of the financial markets)? Economics effect on the welfare of the country is even more important than the military defense of the country? So maybe a new council is needed that has a higher authority than the National Defense Council that would be responsible for the overall welfare of the country?

http://www.ft.com/cms/s/0/083f9b58-321b- 11df-b4e2-00144feabdc0.html

http://blogs.reuters.com/columns/2010/03  /17/yuanwatching/

What do think is needed???
Is this worth thinking about?

Posted by Brahman | Report as abusive