The Role of Central Banking in China's Economic Reforms (review)

Reviews 135 Carsten Holz. The Role ofCentral Banking in China's Economic Reforms Cornell EastAsia Series, no. 59. Ithaca, NewYork: Cornell University East Asia Program, 1992. xiii, 220 pp. This is a timelybook for specialists on China's economy. Despite its many shortcomings , it may well be an indispensable book for those who focus on China's monetary policy and financial system. The author displays an uncanny foresight when he motivates the book by asking in the preface (apparently written in mid-1992): "Is overheating and subsequent clamp-down an inevitable phenomenon in the Chinese economy?" and then in the last sentence of the book: With a reformist tide rising in the PRC in 1992 it would not be astonishing ifbefore long a more reform-oriented team were to take over the leadership of the PBC [reviewer's note: People's Bank of China] and, parallel to the changes in the real economy, once more set out to modernize central banking. At the time of this review (September 1993), China is indeed going through its fourth episode of"overheating and subsequent clampdown" since reform began in 1979, and indeed a "more reform-oriented team" has "taken over the leadership ofthe PBC ... (to) set out to modernize central banking." When Vice Premier Zhu Rongji took over the governorship ofthe central bank in early July, for the first time the People's Bank of China is headed by an official who is apparently committed to monetary and financial reform and is endowed with sufficient political clout to overcome resistance from all levels of the government. Monetary and financial reform in China is long overdue. Since 1978, reform has transformed the nation from a rigidly controlled and centrally planned economy to the vibrant and increasingly market-oriented economy it is today. It has brought prosperity and an improved standard ofliving to hundreds of millions ofpeople in that country. Its success provides a sharp contrast to the disastrous outcomes ofreform in virtually all the other formerly centrally planned economies. Yet, as this book's author correctly points out, China's success in economic copyright1994reform has beenlimited to its real economy: in agricultural prices, foreign trade, by Universityoftownship and village industries, private andjoint-venture enterprises, and so on. Hawai'i PressThe essence ofthe reform in the real economyhas been the gradual removal of 136 China Review International: Vol. ?, No. ?, Spring 1994 state controls that had strangled productive incentives. In contrast, little of that has occurred in the financial sector. Banks continue to serve as the handmaiden of the government. Loans are allocated according to central planning, as they were before the reform. Unlike before the reform, however, because decentralization ofpolitical power has increasingly led to regional economic fragmentation, bank loans are also directed by local government officials to support local industries , often in disregard for the soundness of the loans and the loan limits proscribed in the national credit planning as well. Under these circumstances, the waste of the population's savings has been enormous, and the central bank's control of the nation's money supply has become increasingly ineffective. At long last, the Chinese authorities are getting ready to undertake the arduous task ofmonetary and financial reform. Reform has been made necessary by the general recognition that long-run economic progress requires a more market -oriented financial system, but the task has been made more arduous by the powerful vested interests at various levels of the government and by enterprises that have thrived under the present chaotic system. As the drama of China's monetary and financial reform unfolds, those who are interested in the Chinese economy in general and its monetary policy and financial system in particular will find this book a useful background reading, focused as it is on central banking, to supplement the much more comprehensive World Bank study, China: Financial Sector Policies and Institutional Development (Washington, D.C., 1990). After a briefintroduction, which provides a broad-brushed sketch of the structure of China's financial system, the book is divided into two parts plus a concluding chapter. Part 1 introduces the organizational structure of the People's Bank of China, and then, in the subsequent chapters, describes the central...