The independence of the People's Bank of China
There is rarely a central bank among the countries in the world assumes such many responsibilities like the People's Bank of China. The history of central banks of other countries is basically a story about regulating the economy by monetary policy: tighten monetary policy when economy is overheated and loose such policy when economy slows down. Although there are different views in terms of adoption of inflation targeting or discretionary monetary policy between different countries, the objectives subject to the policies of central banks, generally, neither direct at special industries, such as to support "agriculture, rural areas and farmers"; nor specific enterprises, such as policies requiring loans to be biased to "small and middle-sized enterprises"; nor macroscopic economic targets exceeding the capability of the central bank such as increasing employment. However, this is just the predicament faced by the People's Bank of China.
Why is the Chinese central bank overburdened with such many "functions"? On the one hand, it is because of the blurred functional positioning of the central bank. Decision makers place too many expectations on the central bank, hoping that the central bank will complete various missions without considering the problem of compatibility between different targets and thus the central bank is lost amongst the multiple targets. And basic policy targets such as interest rate liberalization are usually postponed due to political and social pressure stemmed from economic fluctuation in the short-run.
On the other hand, the reason lies in the lacking of independence of the central bank. Monetary policy is often a kind of market equilibrium which focuses on a wider scope because interest rate, as the price of money, is applicable to almost all markets. The general target of the central bank is not always consistent with those partial targets of the NDRC (National Development and Reform Commission) or the Ministry of Commerce. However, the opinions of the central bank are not regarded as the most important ones in the internal competition of government. In such a case, even if the central bank is strong in will but it is actually weak in power to carry forward a truly independent monetary policy.
Consequently, even if the progress of interest rates liberalization may follow certain pattern, its success is ultimately determined by the independence of the central bank. If we consider interest rates liberalization in a context under which the central bank is lacking of independence, then there will be more constraints which are more complex, and the possibility of distortion of interest rate is also higher.
As for the discussion on the sequence of interest rates liberalization, scholars may concern more about the theoretical significance. However, this is an extremely practical consideration in China. Therefore, even if there is theoretical support for the simultaneous liberation of credit rate, monetary market rate and the interest rate regulated by the monetary policy of central bank, such synchronization may be hard to realize when bounded by the actual system. Since the interest rates liberalization in the money market may be initiated by its own profession and involve only the market between institutions, such liberalization, surprisingly, has the potential of breaking out. However, since credit interest rates liberalization is related with enterprise operation and therefore further related with employment, such liberalization is not such easy to be advanced.
Ultimately, policy is relying on the implementation by administrative organizations, and the capability of central bank is a critical factor to decide whether it can effectively carry out monetary policies and push forward interest rates liberalization or not. The question is where is the origin of the power of central bank?
In fact, no matter observing from the educational background of the staffs of the People's Bank of China or from their ability, it all indicates that the central bank of China is a highly professional organization. However, the problem is that the authority of such professionals is not well respected in China. This is not only a problem of non-professionals leading the professionals, but also the problem related with constraints caused by competition between department benefits, which finally leads to a restricted central bank without independence.
Therefore, from the perspective of enhancing the independence of central bank, interest rates liberalization is not merely a topic under economic reform but also a subject involving governmental reform. Nevertheless, Chinese reform is always like this. Thus those policies which do not accord to economic rules may need more scrupulous investigation which probes into the political structure behind the phenomenon. If we do not correct it fundamentally, it is also hard to treat the symptoms. It is true for interest rates liberalization, and so is it for economic reform.
