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PBOC's Zhou: Changes Too Quick May Cause Overshooting

Published Tuesday, 12th October 2010 10:02 am - © 2010 MNI News

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--ECB, BOE, PBOC Heads Agree Must Not Blur Fiscal/Mon Pol Lines

By Yali N'Diaye

WASHINGTON (MNI) - People's Bank of China Governor Zhou Xiaochuan Monday said during time of crisis, some might not have the patience needed to allow adjustments to take effect, warning that acting too quickly could risk overshooting the intended goal.

During a panel discussion on how the current financial crisis has changed the role of central banks, the heads of the Bank of England, European Central Bank, as well as the PBOC stressed the importance of drawing clear lines between monetary and fiscal policies.

Although the panel discussion, organized by the University of Virginia's Miller Center, included ECB President Jean-Claude Trichet and BOE Governor Mervyn King in addition to Zhou, there were no comments on current monetary policy decisions, the economic outlook or foreign exchange issues. There were also no questions allowed from the audience.

Still, former U.S. Treasury Secretary John Snow, who moderated the panel, questioned Zhou on global rebalancing, with China's foreign exchange policy often blamed for fueling widening global imbalances.

China, Zhou said, does "support a balanced growth framework," and the currency is only one aspect of it. However, he did not elaborate further on that aspect.

Instead, he focused on the structural changes taking place in China, where the economy is shifting from relying on just the manufacturing sector.

But, "It takes time," Zhou said.

However, "during the crisis period, people may not have that kind of patience," he added, as they would like to see "quick changes."

Quick changes, however, "may cause a kind of overshoot."

So China supports a "strong sustained balanced growth framework" by using the right of policy instruments.

After slashing interest rates almost to zero, quantitative easing has been a key policy tool used by central bankers around the globe to ease monetary conditions, leading to a massive expansion of their balance sheets, including in the UK.

"So we have to deal with that," the BOE's King said.

He also said it is not the role of the central bank to allocate between the types of assets to buy.

There is a clear difference "between central banks buying assets for the long term" and the private sector deciding in which sector it will buy assets, King said.

"It wasn't our task and it would be risky for us," he continued, "to go beyond deciding on the total scale of assets that we will buy."

That is the role of the government.

So it is very important to draw a clear line between policies, with central banks focusing on price stability.

Monetary policy decisions, Trichet agreed, whether using conventional or unconventional instruments, are designed to deliver on medium-term price stability within the euro zone, while fiscal issues are not the central bank's responsibility.

"We are very attached," Trichet said, "not to blur the competences and the responsibilities" between monetary policy and fiscal policy.

In other comments, Trichet said there is a need to make the financial system "more resilient" in rebalancing the global economy.

This is what the most recent accord on capital standards by the Basel Committee is helping to accomplish and "Basel III has proven that the international community was very much united," Trichet concluded.

** Market News International Washington Bureau: 202-371-2121 **

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