Inflation targeting insufficient: China’s Zhou

The financial crisis has shown that inflation targeting is inflexible and insufficient in achieving other macroeconomic goals, Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), has said. In an interview published by China Finance magazine on Monday, he indicated that these sentiments were echoed internationally.

"When the Federal Reserve formulates monetary policy, it targets both low inflation and high employment. Other central banks do this as well, and in overcoming the financial crisis, it's clear that monetary policy that targets low inflation as the sole goal is very insufficient," he said. He stressed that the PBoC has four goals: low inflation, economic growth, high employment and maintenance of the balance of payments.

Zhou said central banks would have to think dynamically to "enhance the precision and flexibility of policy," and that the acuteness of policy was particularly important as the foundations of the economic recovery were still unstable. He put this down to weakness in "the intrinsic strength of the business upturn," and reiterated a policy statement issued in December, in which the central bank pledged to continue with its moderately loose policy stance, saying there was "substantial room for growth" in demand. 

Chinese monetary policy, like some of the country's domestic markets, still had scope for growth and refinement, he added. "Although money markets in our country have made considerable progress, other markets, such as the stock market and the mortgage market, are still not very mature - investors have not experiences major rises and falls, and lack experience. Chinese monetary policy needs to be clearly communicated with the public, and it also requires more tools," he said.

Monetary policy was also evolving on a global scale as a result of debate in international fora such as the Financial Stability Board, Zhou noted. Discussions of regulatory policy tools, such as leverage ratios and capital adequacy requirements to monetary policy were important, and the question of counter-cyclical capital buffers was crucial, he said.

Click here to read the interview (in Mandarin only)