I’m a bit late on this, but it’s important. Bob Davis over at WSJ writes:
The PBOC, indeed, often doesn’t know about monetary decisions until it is informed by higher-ups, Chinese officials say. It is just one of a dozen ministries that lobby top decision makers in the Chinese government and Communist Party about whether or not to raise interest rates or boost the value of the currency to fight inflation. The central bank often loses such battles to ministries that represent go-go exporters and free-spending local governments, say economists who track the process.
It’s a good explanatory piece on how China’s monetary policy is not determined by an independent authority.
The benefit of an independent central bank is essentially for market credibility. Reasonable people could argue that the US doesn’t have an independent central bank, because the Fed implicitly assures markets that it will use monetary policy to stabilize equity market prices. The same politicization could be said of the ECB, which is probably raising interest rates in part so that Mario Draghi can prove to Angela Merkel he’s not a soft Italian on monetary policy.
But that’s sort of irrelevant because market credibility is a matter of degree that is determined on the margins. When the fit truly hits the shan, bondholders know that an independent central bank is much, much more likely to pull a Paul Volcker and willingly throw the economy into recession to preserve price stability. By contrast, a politicized monetary authority – like the Poliburo – will rationally choose to inflate away its debt.
What I want to know is why this isn’t encouraging households to save less and accumulate more debt. If China’s monetary policy is institutionally geared to favor low interest rates and high inflation, in the long run borrowers (currently the government and SOEs) win while savers (currently households) lose. In aggregate, market agents should be more willing to take on debt knowing that low interest rates and inflation will ease the burden. Likewise they should be less willing to save and/or become creditors.
Put another way, would China’s savings rate be even higher if it had an independent central bank?