China Set to Keep Central-Bank Head in Place

Rather than switching out the country's widely respected central banker, China's leaders are poised to keep Zhou Xiaochuan in his job for an extended period beyond the usual retirement age, according to several party and banking officials.

The move is aimed at ensuring continuity in financial-sector policy making, the officials said, and signals a desire to stay on course with the kind of financial reforms Mr. Zhou has pushed, including a more flexible yuan.

Mr. Zhou turned 65 in January, and there had been some expectations that he would step down at a meeting of the National People's Congress in March as part of a wider once-a-decade leadership transition. However, the officials with knowledge of the matter say that he now could stay on for as long as a year or two. They cautioned that the arrangement is subject to last-minute changes.

At the same time, the leadership is planning to name Xiao Gang, chairman of Bank of China Ltd. (601988.SH, BACHY, 3988.HK), as the central bank's Communist Party chief, putting him in line to succeed Mr. Zhou as governor of the People's Bank of China, according to the officials.

During his decade as central banker, Mr. Zhou has been pushing financial reforms at a steady pace, including making the yuan a freer currency and establishing a more market-based interest-rate system. Mr. Zhou has helped convince China's leaders that they need to make such changes as a way to remake the economy so it relies more on domestic demand and less on exports and investment in capital-intensive industries at home. Several Chinese economists said the leaders have grown comfortable with him at the helm of such sensitive changes that affect the stability of China's financial system.

PBOC and Bank of China officials declined to comment. Messrs. Zhou and Xiao couldn't be reached for comment. Reuters reported on Wednesday the possibility that Mr. Zhou would stay in his job next month when the nation's leaders are expected to make decisions about top economic slots, including the head of the central bank.

A party official with knowledge of the matter said the move to retain Mr. Zhou received support behind the scenes from former Communist Party chief Jiang Zemin. Mr. Jiang, now 86 years old, is viewed as the most powerful kingmaker in Chinese politics. Mr. Zhou had worked with him for years on banking and reform issues before Mr. Zhou became PBOC governor. Early in his career, Mr. Jiang worked for Mr. Zhou's father, who was a senior Chinese official.

Banking and party officials say that appointing Mr. Xiao as PBOC party secretary would give him time to learn the job and get coaching from Mr. Zhou, particularly on international financial matters. "Governor Zhou is extremely well respected among central bankers and not easy to replace," said Harvard University economist Kenneth Rogoff.

The two don't always see eye to eye on important issues. In a China Daily article last fall, Mr. Xiao called for tighter regulation of China's informal lending system, under which ordinary Chinese can get much higher rates on their money, likening it to a Ponzi scheme. But Mr. Zhou has defended the system, which some economists argue is a way for China to weaken the government's strict control on interest rates--a goal of many economists who think China's financial system should operate by market principles.

"Shadow banking is inevitable when banks are developing their business," Mr. Zhou said at a November news conference, after the Xiao article was published.

Having Messrs. Zhou and Xiao work together could give them time to align on policy, an especially important goal in a political culture that values consensus. This could be "a very wise and intelligent arrangement," said Lu Feng, deputy director of Peking University's National School of Development. "If Zhou stays awhile, he could help the potential successor design and formulate reform policy."

Until the last few weeks, it appeared that Mr. Zhou was on his way out. In addition to being retirement age, he wasn't reappointed in November to the Communist Party's 205-member Central Committee, one of the party's chief policy-making groups. Central Committee status is usually required for a central-bank head.

Now, say banking and party officials, China's leaders are trying to cobble together an additional posting for Mr. Zhou in the Communist party hierarchy, probably as vice chairman of the Chinese People's Political Consultative Conference, a political advisory body, as a way of giving him "national" standing in the party and getting around the retirement rules.

Some economists have said that mishandled interest-rate liberalization helped trigger financial crisis in a number of countries, including the U.S. Allowing banks the discretion to decide for themselves how much to pay for deposits could set off frenzied competition to attract savers, which, in turn, could cause lending standards to be weakened as banks' funding costs rise.

Mr. Zhou is among China's most recognized and respected economic officials internationally, mixing easily with central bankers in Europe, the U.S. and Japan who look to him for reading on the Chinese economy. While the PBOC lacks the independence of the central banks in U.S., Japan and Europe, Mr. Zhou has proven to be an effective advocate in the top decision-making bodies of China's government and party, which set overall monetary policy.

Under his watch, China has moved to loosen some controls over its currency in the hopes that it may some day challenge the dollar as a global currency. Chinese leaders have set a goal of opening up the country's cross-border capital flows in the next few years.

In some of his recent public remarks, Mr. Zhou indicated an intention to move at a measured pace with the currency and capital-account reforms, saying that China will keep controls on capital flows even as it moves toward a more convertible yuan. "We shouldn't interpret capital-account convertibility as a free currency, with cross-border asset transfers without control and zero financial supervision," he said in December.

Bank of China's Mr. Xiao, 54, was selected to the party's Central Committee in November, which paved the way for him to get a senior ministerial-level slot such as head of the central bank. In addition to him, other contenders for the PBOC governor job included Shang Fulin, China's top banking regulator, and Guo Shuqing, the top securities regulator. Had either of the other two contenders gotten the PBOC job, Mr. Xiao was expected to fill that regulatory vacancy.

Under Mr. Xiao, Bank of China has transformed from a bank known within China mostly for its international business into one that increasingly focuses on the domestic market. Mr. Xiao, known within the bank as a low-key and hard-working executive, also has been politically savvy. Although Bank of China was the least profitable of China's top four state-owned banks in the first nine months of last year, it was the most aggressive of the so-called Big Four in ramping up lending in 2009 when the party requested that to fight the global financial downturn.

Mr. Xiao also has experience with the PBOC, serving as a personal assistant to Lu Peijiang, the PBOC governor in the early 1980s, and later serving as a deputy governor of the central bank.

A leading contender to take Mr. Xiao's job is Hu Xiaolian, currently a PBOC deputy governor, according to several banking and party officials.

One of Mr. Xiao's banking peers, Jiang Jianqing, chairman of Industrial & Commercial Bank of China Ltd. (601398.SH, 1398.HK, IDCBY), was passed over for promotion to the Central Committee. Some party and banking officials have said ICBC didn't ramp up lending sufficiently in 2009, contributing to Mr. Jiang's lack of political advancement.

Write to Lingling Wei at lingling.wei@wsj.com and Bob Davis at bob.davis@wsj.com

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