What a new PBOC boss means</p> <p>Adrian Mowat, Managing Director, Chief Asian and Emerging Market Equity Strategist at JP Morgan, says the leadership change will likely cause confusion about monetary policy.</p>
A change of guard at China’s central bank is unlikely to herald a major shift in monetary policy but could alter the pace of financial reforms, economists say.
Chinese President Xi Jinping is considering replacing People’s Bank of China (PBOC) Governor Zhou Xiaochuan as part of a wider personnel reshuffling following internal battles about overhauling the economy, The Wall Street Journal reported late Wednesday, citing party officials with knowledge of the plans.
While these plans remain speculative, Xi may be looking to replace Zhou due to differences in their visions for modernizing China’s monetary policy, including the speed of interest rate liberalization, said Dariusz Kowalczyk, senior economist, Asia ex-Japan at Credit Agricole.
“Zhou is pushing for interest rate reforms, which would lead to an upward pressure on rates. Slowing growth is not ideal for a higher interest rate environment. Perhaps that’s the reason why there is speculation about his departure,” he said.
The rumors come against a backdrop of slowing economic activity in the mainland, which has triggered fears of an accelerated slowdown and raised expectations of further measures to bolster the economy.
If Zhou is replaced, it could delay the liberalization of interest rate and opening of the capital account, Kowalczyk said.
Zhou, 66, who has led China’s central bank since 2002 has been at the forefront of financial reforms to unleash more market forces in the economy.
Rumors around Zhou’s replacement are not new and have been in place for some time largely because he is working beyond the retirement age of 65 for cabinet-ranked Chinese officials. He was reappointed for his third term in March 2013 after the government devised a workaround to keep him in office.
The PBOC sought to quell speculation, saying in a statement to the Journal that Zhou would not be stepping down soon.
Nevertheless, the market appears to be taking the rumors seriously, according to market watchers. There has been an increase in implied volatility for RMB options, which signals that investors are unclear on what a new governor’s FX policy would be, they said.
Aggressive easing? Don’t hold your breath
A change at the helm of the PBOC is unlikely to alter the central bank’s policy stance, Kowalczyk said.
“I wouldn’t be concerned with what happens with monetary policy especially because the central bank is a department under the government. Monetary policy isn’t run independently by the central bank. People who ultimately pull the strings wouldn’t change,” he said.
Despite slowing growth, the central bank has resisted cutting interest rates or the reserve requirement ratio (RRR), opting for more targeted measures.
Manpreet Gill, senior investment strategist at Standard Chartered Bank also expects policy continuity.
“If you think about the different levers within China, they’ve all been centered around keeping enough growth happening without letting credit go loose,” he said. “While individuals may change, the broader policy theme doesn’t look like it’s changing any time soon.”
Still, Chris Konstantinos, director of international portfolio management at Riverfront Investment Group says the market is reading the possible change of guard at the PBOC to mean aggressive monetary easing might be on the way.
“My personal view is that it’s a little early to tell. First of all, whether the rumor is true and if it is true, what the rationale is behind it. In China, it’s tough to tell whether it’s a monetary thing or power consolidation,” he said.