China and The People's Bank
China: People’s Bank of China
This article has been produced by the efforts of the following members:
Oscar Crawford-Ritchie – Research Assistant
Louis-Claude Perrault-Carré – Team Leader for China-Industry
China’s central bank, the People’s Bank of China (PBC), is to act as a regulator of the Chinese banking system and its financial markets and to create and implement the country’s monetary policies. The bank is managed by a governor, currently Dr. Zhou Xiaochuan, along with a number of deputies and assistants. The PBC has limited independence from the government with policy decision being made mainly by the state, unlike most industrialized nations’ central banks. There does appear to be growth in greater independence, at least in the day-to-day operations and in policy implementation.
Over the last five years the bank has tightened credit in a successful effort to avoid inflation and to curb unsustainable growth. In the past few months, as the Chinese economy has slowed, the PBC has loosened restrictions on the availability of credit. This has only occurred with certain state owned institutions such as the China Development Bank and to some commercial banks.
In November 2014 the central bank did cut their interest rates slightly to help stimulate investment. Since the start of 2015 the PBC has continued to inject liquidity into the commercial banking system but increased relaxation of credit is still being requested because of the continued decrease in short term investment within the country.The central bank is inputting cash into the banking system rather than lowering the interest rate because of the recent increase in bad loans. Without drops in the interest rate, firms will find it more difficult to service their large amounts of debt, especially with the drop in inflation.
The most significant risk associated with a tight credit, or even a neutral credit policy in the current economy, is that private industry will have difficulty obtaining the funds needed for investment and growth. The high interest rates forces firms to pay large amounts into servicing their present debt, which takes away from cash that could be further invested. An injection of cash into the banking system helps to generate investment, and a lower interest rate is needed to give industries better opportunities to borrow and invest. Without growth through investment, the GDP growth slowdown could continue, making it more difficult to service the huge amount of debt China is currently holds.
Another major risk is the lack of transparency of the PBC - considered one of the least transparent major central banks in the world. The central bank in China rarely releases public plans about their interest rates, making any change a surprise. This makes it more difficult for companies to plan for the long term as they cannot take into account any foreseeable policy change. Borrowing becomes speculative as a firm could hold off borrowing if they suspect that the interest rate may drop in a short period of time but if it rises instead that firm is forced to pay a higher cost for the credit.
Risk mitigation is difficult in this situation as smaller companies are at the mercy of the central bank’s policy decisions. It does appear that the bank has been implementing policies in an effort to increase investment availably but because of the lack of transparency it is difficult to predict the exact plans and policies. All borrowing should be done carefully, in a way to maximize the chances of being able to pay back the debt. With high interest rates it is difficult and costly to repay loans, so even with increased credit availability borrowing by smaller firms should be done with prudence and care.
