The People’s Bank of China (PBOC) vs. Western Counterparts


The People’s Bank of China (abbreviated PBC, or more commonly PBOC) has been the world’s “richest” central bank by asset valuation since July of 2017, a valuation north of $3 trillion at the moment of writing. Just like any other central bank, the PBOC has responsibilities with respect to setting monetary policy and acting as a regulator for financial entities located in mainland China (as mentioned in other articles, Autonomous Regions such as Hong Kong have a special status).

Can the PBOC be pretty much considered a “status quo” central bank?

Once again, we have to unfortunately point out that things are different in China. Governed by Commercial Bank Law and People’s Bank Law, someone familiar with how things work in China and the high degree of control the Communist Party on China has over pretty much all entities would be tempted to say that compared to many or even most Chinese institutions, the People’s Bank of China has been granted a fairly high degree of autonomy.

By Western standards… not so much.

Established back on the 1st of December 1948, the PBOC is “owned” by the State Council of the People’s Republic of China and has its main headquarters in both Beijing and Shanghai. It is currently governed by Yi Gang (who has held this office since March of 2018), who serves under Guo Shuqing (party branch secretary)… with the nuances which govern the realities surrounding the PBOC being made clear by the “party branch secretary” dimension.

In the West, the idea that a central bank should be independent has been popular for an extended period of time. In theory, this should allow those behind monetary policy choices (central bankers) and those in charge of fiscal policy to cooperate on the one hand but also keep each other in check on the other.

While political pressures are anything but uncommon in the West (for example, the vocal criticism by president Donald Trump of Federal Reserve measures that he considered too tame) and it would be childish at best to assume that central banking doesn’t come with its own political strings attached… let’s just say that for the most part, central banks enjoy a meaningful level of autonomy in the West.

This comes with advantages (the fact that the experts in charge are or should be able to shape monetary policy as they see fit rather than succumb to politics-related temptations such as embarking on overly-populist/dovish journeys) as well as disadvantages. And the disadvantages tend to revolve around the fact that in the absence of stellar coordination with those in charge of fiscal policy, monetary policy can be severely limited in what it is able to accomplish.

The Great Recession and its consequences represents a textbook example to the effect. On the one hand, central banks across all Western nations have embarked on very aggressive monetary policy journeys in an effort (that many called and still call desperate) to revive economic activity. In the United States, more money was “printed” by the Federal Reserve in one year at the height of its Quantitative Easing experiment (roughly one trillion US dollars per year) than had existed in the monetary base from 1913 up until the Great Recession (approximately 800 billion US dollars in just under 100 years) and the European Central Bank embarked on an even more aggressive easing agenda at the height of its easing program.

Was the result remarkably high inflation?

No, simply because most of that money ended up being “hoarded” as reserves by commercial banks and didn’t find its way to the let’s call it real economy. As a bit of an extreme example, it would have been multiple orders of magnitude more inflationary to hand out money to individuals directly (“helicopter money” being the term some economists like to use) because… of course, that money would have been far more likely to end up actually chasing products and services that people consume, resulting in increased economic activity as well as inflation.

Western central banks just don’t have that level of control and as we were able to find out, the very aggressive monetary policy choices which came after the Great Recession has many results (asset price inflation, increased liquidity at certain levels of the monetary equation, etc.) but consumer price inflation was not one of them. In other words, if monetary policy is not equally matched by fiscal policy (for example government spending programs), it becomes much more difficult to control what happens to the money a central bank injects into the proverbial system.

In China, where “control” is the operative word and institutional independence is most definitely not as much of a priority as in the West (to put it mildly), a more politically controlled central bank is obviously involved in an equation where the authorities have much more of a say over the entire process: how much money is injected into the financial system, what happens to that money, when that happens and so on.

At the end of the day, it’s a “pick your poison” scenario.

In the West, central banks in particular and institutions in general are far more independent than in China and while this means they have less control over what happens after their monetary policy prescriptions, there is tremendous value in knowing that (for the most part) decisions are made by expects for reasons that do not pertain to politics.

In China, the opposite tends to represent the status quo framework, with the PBOC (while more independent than other Chinese institutions) representing a piece of the Communist Party of China puzzle. As a result, it is possible to have a larger degree of control over the entire “monetary policy + fiscal policy” equation but the price that has to be paid is one most economists consider too steep: a quasi-surrender to the will of a political entity, in our case the Communist Party of China.

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