George Chen

By George Chen
The opinions expressed are the author’s own.

So, Dominique Strauss-Kahn has resigned with immediate effect. But to the International Monetary Fund it’s hardly the end, just a new beginning.

So who will be the new leader of the IMF? In Beijing, there’s growing ambition and confidence that a Chinese candidate should be appointed, or at least considered.

Zhu Min, a native of Shanghai who experienced the horrible Cultural Revolution and then managed to be admitted into the prestigious Fudan University after the political movement ended, is widely considered and promoted by domestic media as a strong Chinese candidate for the top IMF post.

In the West, Zhu is probably not so well known, although he made his reputation in the banking world after he helped the Bank of China go public in Shanghai and Hong Kong. Last year, Zhu was named by Strauss-Kahn as his special advisor in the IMF, providing Zhu with an international platform from which to raise his profile.

Zhu also studied at Princeton University and John Hopkins University where he obtained a doctorate degree in economics. He speaks fluent English. He’s also widely considered in the financial industry as a master of presentation and communication skills — he led the IPO roadshows for the Bank of China in 2006. Later he was promoted to be a deputy governor of China’s central bank, the People’s Bank of China.

Another possible candidate promoted by domestic media and some scholars and economists is China’s central bank chief Zhou Xiaochuan. Some money-losing Chinese investors say Zhou knows how to do nothing but raise banks’ required reserve ratio again and again, which is already at a record high of 21 percent.

Zhou is no stranger to the West. To some extent, he may be considered even more influential in moving global markets than U.S. Federal Reserve chief Ben Bernanke, especially in the wake of the global financial crisis as the world looks more to China for economic trends.

Zhou, who was born in 1948 and took the top central banker post at the end of 2002, could retire next year when Vice-President Xi Jingping is expected to take over the top leadership from President Hu Jintao and a new administration is formed. Were Zhou to move to the IMF, he could earn some decent money as central bank chief in addition to keeping a high profile on the global financial stage. Whereas now he is considered a civil servant, Zhou’s monthly salary may be just a couple of thousand yuan.

Neither Zhou nor Zhu have made any public comment on their interest in the post, but Zhou last night said something meaningful for China in a statement on the central bank’s website. Zhou noted that the IMF’s future leadership should reflect the growing clout of emerging economies, joining other developing nations in pressing for greater influence on the world stage.

The reason I raise the topic here is not just because of the importance of the IMF but more so because Beijing’s growing ambition in international financial affairs could reflect its growing determination to make the yuan more internationally powerful.

I am not saying Beijing wants to make the yuan fully convertible anytime soon, but it’s clear the government is keen to use the yuan, a symbol of its strong economic development as well as a political weapon to defend its role and influence in global affairs.

This is good news for capital markets. If Beijing had shown no interest in the IMF, I might have been worried.

When you harbor the ambition of putting your man in the top IMF seat, you know you have to be part of the global game. When you play the global game, you must obey some of the rules, which means China’s economy must become more open and its currency stronger.

Beijing already has supported Taiwan-born Justin Lin to take the post of chief economist at the World Bank. It now has its sights on the top IMF post. As a native of Shanghai, I wish my Shanghai fellow Zhu Min the best of luck.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: Zhu Min, special adviser to International Monetary Fund Managing Director Dominique Strauss-Kahn, attends a session at the World Economic Forum in Davos January 26, 2011 REUTERS/Vincent Kessler

By George Chen
The opinions expressed are the author’s own.

There’s apparently growing debate in Beijing over the possibility of interest rate reform next year. The latest opinion was voiced by a senior central bank official, who said the government should lift the ceiling on bank deposit rates to help rein in accelerating inflation in the world’s second-biggest economy. Will this happen in 2011? It seems much more likely than the possibility of a fully convertible yuan anytime soon.

“China should allow deposit rates to float upwards. It would gradually enable the market to price in expectations of interest rate rises,” Sheng Songcheng, head of statistics at the People’s Bank of China, said in an article published on the central bank website late on Dec. 29. “That would help change negative real deposit rates and curb inflation,” he added.

If Sheng had published the article as a commentary in a local newspaper, it would more likely have been considered his personal opinion, but posted on the central bank’s website, the top headline on the front page no less, it’s certainly something to be taken very seriously. In my view, Sheng’s article was published not only for the market to analyze but also as a pitch to the top leaders in Beijing for more serious consideration.

Beijing controls China’s interest rate market by setting a ceiling on deposit rates and a floor on lending rates. This protects banks from competition and ensures they have a decent interest rate margin, which is around 3 percentage points now — that’s partly why banking jobs in China are very popular and considered one of the most stable jobs, in particular with big state-owned lenders.

Many people say working for a bank in China means you have an “iron rice bowl”. The interest rate margin provides a safe and stable channel of profit for banks. Whatever they do, they have the “3 percentage points” to make money. However, given that the rate is fixed by the central bank, it may also explain why local people often complain about the service they receive at big banks in China. How bad? You should consider it normal if you are stuck in a long queue for about 30 minutes or even an hour before you reach the teller.

The central bank usually raises both loan and deposit rates, like the newest rate increase on Christmas Day, which leaves the profit margin of banks unchanged. If interest rate reform really takes place next year, we should see a lot of interesting stories about the banking industry. At least, I do hope more competition can bring Chinese financial consumers better service.

In fact, any move towards a more market-oriented interest rate reform is not just about the banking industry. Such moves will also affect the foreign exchange rate of the yuan, which may well explain why some officials at the State Administration of Foreign Exchange don’t really like the idea of a free interest rate market. They say it may encourage more speculative money inflows to bet on faster yuan appreciation, making the foreign exchange regulator’s job more difficult or less important to some extent.

Why less important? You might think they would be busier fighting a faster rising yuan. Yes and no — if you have some decent central bank sources in Beijing, you may come to know that there’s always a strange tension between the PBOC and the SAFE, similar to the tension between interest rates and the foreign exchange rate. I remember a SAFE official once privately told me that the day the yuan becomes fully convertible may be the same day the offices of the SAFE are closed.

This may sound extreme but think — the SAFE’s job is to control the yuan, the more convertible the yuan becomes, the less controls you need. Then that will also affect many people’s jobs, promotions and even their political careers. Does this explain the unique relationship between the SAFE and the PBOC?

Currently, the SAFE is one rank lower than the PBOC as foreign exchange regulation is considered a function of the central bank in China. The current head of the SAFE is Yi Gang. He is also a deputy governor of the PBOC and reports to central bank chief Zhou Xiaochuan.

However, some SAFE officials believe SAFE should play a more important and independent role in making foreign exchange policy and related matters, given the significance of the yuan, which often has a major impact on China’s diplomatic relations such as the ties with the United States. To some extent, some market observers say the unique tension and internal bureaucracy between the SAFE and the PBOC actually serve to slow currency reforms and the internationalisation of yuan.

So, who’s going to have the final say? The State Council, China’s cabinet led by Premier Wen Jiabao and President Hu Jintao of course. Hu is going to meet U.S. President Barack Obama next month and the two gentlemen will for sure touch upon the yuan issue.

From all the signs I can see here, China is ready to let the yuan rise faster next year, so our American friends should be happier. In return, at least Hu deserves a better reception during his visit next month. Remember Hu’s last visit to the United States? It was not considered a very successful or happy trip by some political observers.

Meanwhile, the yuan debate will continue at home, but this time the central bank seems determined to push forward interest rate reforms first to make Chinese people feel happy. Then Hu and Wen should be happy too.

Some people say central bankers are the real politicians in China, and I sense their counterparts at the Federal Reserve are learning to perform a similar role. What’s your say?

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: China’s central bank governor Zhou Xiaochuan answers a question at a news conference during China’s annual session of parliament, in Beijing March 6, 2010. REUTERS/Jason Lee