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China’s Quiet Central Banking Revolution

Since Yi Gang became governor in March 2018, the People’s Bank of China has improved its communications, boosted its transparency, and moved toward a flexible exchange rate. Although the PBOC has plenty of room for further improvement, its progress so far is good news for China and international policymakers alike.

BEIJING – Fifteen years ago, Alan Blinder, a former vice chair of the US Federal Reserve System and a longtime professor of economics at Princeton, wrote a book entitled The Quiet Revolution about changes in central banking. Chief among these was a move by some central banks toward open communication and transparency, and away from their long-held tradition of secrecy and surprise. A central bank “goes modern,” to borrow from the subtitle of Blinder’s book, when it starts talking.

The Fed was slowly heading in this direction by the turn of the century. It finally began announcing its interest-rate decisions in 1994, and started issuing regular press releases in 2000 (though it did not hold regular press conferences until 2011). These changes reflected a new appreciation among central bankers of how changes in short-term policy rates work their way through the economy via expectations and market pricing.

Today, the People’s Bank of China (PBOC) is undergoing its own quiet revolution. Like the Fed before it, China’s central bank is becoming more communicative. But the real revolution in Beijing concerns exchange-rate policy, with the PBOC increasingly allowing market forces to determine the renminbi’s value. Both developments are welcome.

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