Medicine man

Revealing comments from Chinese central banker

Medicine man

Zhou: avoiding paracetamol?

Forget tasting their own medicine: Beijing’s top state banker thinks Western policymakers need to show more respect for Chinese alternatives.

Zhou Xiaochuan, governor of the People’s Bank of China, penned a brief article late last month on the PBoC website in which he suggested that, while Western medicine is based on “theory and case studies”, the Chinese prefer to use “a variety of ingredients to make up a gradual approach”.

There were signs of more of those ingredients at play last week, with a clear change of mood music after the Politburo’s annual Central Economic Work Conference meeting. Concerns about inflationary risks continue to top the agenda, and the meeting’s closing statement reinforced the message that policy direction had already switched from an “appropriately loose” monetary policy to a “prudent” one.

Then last Friday the PBoC announced a sixth increase in reserve ratio requirements this year. Lenders must now keep 18.5% of their funds with the central bank. HSBC expects further reserve ratio hikes in coming months, but also thinks that interest rates will be raised soon as well.

But back to Zhou’s medical metaphor. In the central banker’s paper he advocated an approach akin to that used in Chinese medicine – employing an array of policies that deliver gradual results. His meaning? Western medicines promise a single cure-all drug. But no single policy will solve China’s current issues. Of course, that fits rather well politically with one of the more contentious issues currently shaping Sino-US relations; the ongoing debate about the renminbi exchange rate.

However, he says the Chinese leadership is delivering the gradual economic rebalancing that much of the developed world has been calling for, but over an extended period. Over-focusing on any one area (such as the renminbi exchange rate, say) is not helpful.

He writes: “For example, to address China’s balance-of-payments issues (in particular, the trade imbalance), it is necessary to accelerate the process of changing the economic growth model and making structural adjustments, reduce dependence on external demand, and strengthen domestic demand (especially to boost consumer spending and the development of the service sector).

So, no silver bullets in Zhou’s regimen but more a “basket of measures”. “The pattern shows that China is not of the view that any single ingredient can be particularly useful or that reliance on one ingredient is sufficient.”

An opinion piece in The Economist also went on to make a different point: that many Chinese people use both traditional and Western treatments, relying on Chinese medicine to ward off illness, and Western medicine whenever they suffer an injury or an acute complaint.

That makes perception important. At the moment, the Chinese may see some long-term economic risks ahead. But they do not feel like they are caught in the midst of a real emergency. As a result, more dramatic intervention can be reserved for another day.

“In a nutshell, there are three meanings behind our ‘Chinese medicine’ metaphor,” concludes the PBOC governor. “First, it is not an aggressive approach, but instead a progressive approach. Second, it means not counting on any single measure to have a strong effect. Third, using trial-and-error which involves making modification according to changing conditions.”

The main message to be decoded: a big revaluation of the renminbi won’t solve the world’s problems and like some Western medicines could have nasty side-effects, Zhou reckons.

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