SAFE and PBOC Battle For Control

Major turf wars have been going on since 2005, when the Ministry of Finance muscled out the PBOC. Now the reform camp is back in charge and the PBOC is taking back territory.

China turf war over yuan reform rattles foreign firms
"The PBOC is taking a more open approach (to reform), whereas SAFE sees itself as a gatekeeper," said a lead representative of a foreign business association in China.

The central bank manages the country's money supply and to an extent has authority over Chinese banks, shared with the China Banking Regulatory Commission. SAFE handles the country's foreign exchange reserves and manages cross-border currency flows. Technically SAFE is under the supervision of the central bank, but in practice analysts say the relationship has been frequently adversarial and agendas have conflicted.
And who do you think is backing SAFE? The princelings.

Skeptical economists have pointed out that China has been committed to opening up its capital account since 1993, yet has failed to follow through; to them the pilots are designed to deliver the appearance of a reform drive devoid of substance.

The dilemma for Beijing is that if the scope of a pilot program is too limited, its success or failure can be criticized as not indicative; but if it is widened to the extent that it serves as a genuine test, massive arbitrage would quickly turn the trial into a de-facto nationwide policy change.

There is also the question of a level playing field.

"It's a little bit frustrating that if you happen to be headquartered in one city versus another city, you get different treatment," said the finance executive.

Others argue the multiplicity of approaches reflects a government deeply divided over what it wants to do.

"The Chinese have been playing bureaucratic games for 2000 years. They are pretty experienced," said Andy Xie, an independent China economist who criticizes the pilot project approach as outdated.

"The meaningful thing is to do something for the whole country, the whole system. Not to open a hole and then put a cap on it," he said.

But Xie said that the most important struggle was not between reformist camps within the bureaucracy but between reformers and vested interests that benefitted from the old status quo.
People who say they are surprised or who think Beijing is lying about wanting reform, do not understand what is happening. The reform camp has been thwarted multiple times by the princelings, the party insiders who use control of state owned companies and the banking system for profit. They do not oppose reform for political reasons, but rather because opening China's capital accounts will lead to foreign competition. This in turn will increase the competitive environment and sources of capital, which favors the more efficient private enterprises. Control will be taken away from party insiders and turned over to the market.

Previous posts on this topic include:
Political reform in China taking place through economic channels
Leadership succession battle in China goes public as Wen slams Bo Xilai on Wednesday; Communist party fires Bo Xilai on Thursday
Economic reform is the key to China's development and political reform is hopeless without it
Why is Wen Jiabao criticizing the banks?

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