Tuesday, August 23, 2005

Eye on China: Yuan reformer 'a rising star'


BEIJING - Guan Anping remembers when Zhou Xiaochuan first urged China's leaders to let the yuan float in the world marketplace. He didn't know then that Zhou would get his message across - 10 years later.

Zhou advocated freeing the yuan in late 1995, a few months after the Chinese Government had pegged the currency at about 8.3 to the US dollar. Zhou, now China's central bank Governor, was the new director of the State Administration of Foreign Exchange.

"He was a visionary on yuan reform long before it became a global issue," says Guan, 48, managing partner at Beijing law firm Anping & Partners and former counsel to the Trade Ministry.

On July 21, China's Government replaced the yuan's peg with a system allowing limited fluctuation against a basket of currencies that includes the US dollar, euro and yen. China had been resisting US appeals to let the currency appreciate since September 2003. The move suggests Zhou, 57, is gaining influence with policy-makers.

"He certainly is a rising political star and there aren't too many people of his calibre within the leadership," says Joseph Cheng, 55, professor of politics at City University of Hong Kong.

"Given the tremendous importance of the financial services sector, I think he's being groomed for higher office."

Zhou has helped create a technically competent central bank that is the bureaucracy's most capable agent of change, says Jonathan Anderson, 43, chief Asia-Pacific economist in Hong Kong at Zurich-based UBS.

Anderson first worked with Zhou in 1997, when he was a central bank Vice-Governor and Anderson was the International Monetary Fund's representative in Beijing. Zhou became bank Governor in December 2002.

"His ability to push any yuan movement is testament to his skills and ability to move forward a moderate yet reformed agenda," Anderson says.

Two days after the central bank announced the yuan appreciation, Zhou was advocating more. In an impromptu speech to the annual Chinese Bankers Forum at Beijing's Presidential Hotel on July 23, he likened a fixed exchange rate to armour against currency speculators. If it was a fierce battle, the shield might fail under pressure, he said.

"The floating exchange rate is more like a cushion, providing a better protection against assault," Zhou said. "Attackers may not be able to get away unscathed."

He said it was a challenge for China to change its thinking on the yuan. Zhou's speech drew a riposte from Xia Bin, director of finance at the State Council's Development Research Centre in Beijing. He was formerly general manager of the Shenzhen Stock Exchange and an adviser on streamlining the central bank.

"My viewpoint is different from Zhou," Xia, 54, told the forum. "I don't think China should move to a fully floating exchange rate in a rush. That will bring big trouble."

The yuan can trade within a limit of 0.3 per cent on either side of the yuan-US dollar exchange rate published by the central bank each day, and 1.5 per cent on either side of the rate published for a basket of other currencies.

Earlier this month, Zhou said the other currencies included the euro, yen, South Korean won, Singapore dollar, British pound, Malaysian ringgit, Australian dollar, Russian rouble, Thai baht and Canadian dollar. The bank also announced it would open the foreign exchange market to companies that import and export at least US$2 billion a year.

Born in eastern Jiangsu province, Zhou has an engineering degree from Beijing Chemical Engineering Institute and a doctorate in economic engineering from Beijing's Tsinghua University. He speaks fluent English and is the first central bank chief with a doctorate degree.

His father, the late Zhou Jiannan, was Machinery Industry Minister in the early 1980s under Deng Xiaoping. As a "princeling", or child of a high-ranking party cadre, Zhou has benefited from political connections, says Cheng Li, professor of government at Hamilton College in Clinton, New York, and author of China's Leaders: The New Generation. Among Zhou Jiannan's ministry workers was Jiang Zemin. Jiang became Communist Party leader in the purge that followed the June 1989 military crackdown in Tiananmen Square, and China's President from 1993 to 2003. Li said Jiang probably championed Zhou's appointment as central bank Governor.

"His father was Jiang Zemin's close friend and even mentor for quite a while," he says. "There are certainly patron ties."

Through the 1990s, Zhou moved steadily up the banking and finance hierarchy. He was vice- president of Beijing-based Bank of China, the country's second-largest lender, from 1991 to 1995, then spent a year at the State Administration of Foreign Exchange. He was central bank Vice-Governor in 1996 and 1997, president of China Construction Bank from 1998 to 2000 and chairman of the China Securities Regulatory Commission from 2000 until his central bank appointment.

While connections may have helped, Zhou succeeded on his merits, says Guan. The pair met in 1986 at the Beijing-based Ministry of Foreign Trade and Economic Co-operation, now the Commerce Ministry. Zhou left as an assistant minister in 1989.

Zhou began advocating step-by-step changes towards a fully convertible yuan as a means to promote economic growth. Guan says in academic journals in 1995, he wrote that the first move should be to give trading companies and "weak" industries such as steel-making greater access to foreign exchange.

"Many people felt the yuan should be free-floated but disagreed on how it was to be done," Guan says. "Zhou's voice was a pioneer in the debate back then."

Left to his own devices, Zhou probably would have favoured a larger initial move last month, said Nicholas Lardy, senior fellow at the Institute for International Economics in Washington.

As central bank chief, Zhou can only recommend changes to the State Council, China's highest administrative body. The council, in turn, takes a proposal to the nine-member standing committee of the Communist Party's Politburo, headed by President Hu Jintao, 62.

"I'm not sure I would interpret this as a victory for him," says Lardy, who first met Zhou in 1986, when Zhou worked at the Economic System Reform Research Institute in Beijing.

"This has the aura of a compromise."

A larger move might have been hard to sell to some standing committee members. "These are not Alan Greenspans," he says. "Their attitude is, 'We've had this exchange-rate system for nine years, we've had rapid growth, so why should we change now?"'

He thinks Zhou's age and narrow focus on the finance industry mean he's unlikely to rise past the position of Vice-Premier.



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