PBoC Governor Says Market Economy Shift Dictates Multi-Objective Monetary Policy
Yicai Global
/SOURCE : Yicai
PBoC Governor Says Market Economy Shift Dictates Multi-Objective Monetary Policy

(Yicai Global) June 27 -- People's Bank of China Governor Zhou Xiaochuan has for the first time elaborated on the central bank's decision to launch a multi-objective monetary policy framework to support China's transition to a market economy.

"The PBoC has multiple objectives, which not only include such four annual objectives as ensuring price stability, boosting economic growth, promoting employment, and broadly maintaining balance of payments, but also cover two dynamic objectives, namely, financial reform and opening up, and financial market development," Mr. Zhou said as he delivered this year's annual Michel Camdessus Central Banking Lecture at the International Monetary Fund in Washington.

"The choice of a multi-objective central bank has to do with China's circumstances as a transition economy," he said.

The country's leadership is attempting to steer the world's second-largest economy away from a growth model rooted in resource-based manufacturing, investment and exports toward one focused more on domestic-driven services, private consumption and innovation.

"The single objective of maintaining price stability is an enviable arrangement as it is simple, easy to measure and communicate," Mr. Zhou said. "However, it is not yet realistic for China at this stage."

The central banker confessed that it would be unrealistic to expect the model adopted by the PBoC to bring benefits without incurring any costs.

"Compared to central banks of other transition economies, the PBoC has promoted reform, developed financial markets, maintained financial stability and created conditions to achieve monetary policy goals," Mr. Zhou said. "The gain is greater that the loss."

"Some commented that our institutional choice has resulted in problems such as excessive credit growth, high leverage ratio and shadow banking, he said. "But these are only problems when compared to other emerging economies."

Due to the multiple objectives and dynamic adjustments, the bank's objective functions may appear to be inconsistent, and the multi-objective and multi-dimensional framework has naturally increased concerns over the bank's independence.

Mr. Zhou responded to these concerns by saying that the bank independence is clearly set down in the Law on the People's Bank of China: "The People's Bank of China implements monetary policy, performs its duties and conducts business independently under the leadership of the State Council, without interference from any local governments, government departments at various levels, social organizations or individuals."

Looking ahead, Governor Zhou said that the current situation may change after the PBoC has achieved relevant reform targets.

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