The People's Bank of China (PBOC) was founded in 1948 and is the central bank of the most populous country in the world. Its headquarters were originally in the Hebei Province, but were soon moved to the large city of Beijing. Within a year of the bank's inception, the ruling Communist party incorporated all of the nation's banks into the PBOC, making it responsible for the nation's commercial and central banking. This dual role did not last long as the commercial banking aspect was separated from the central bank in the 1980's and divided among four independent but state-owned banks. Although the PBOC acted as China's central bank for nearly five decades, it was only legally established as such in the mid 1990's, when the Law of the People's Republic of China on the People's Bank of China was passed.

The central bank's actions are gaining greater importance in the 21st century than in the past. For hundreds of years, the vast, untapped population of China intoxicated Western nations and corporations in search of profits. Recently, those expectations were finally beginning to realize as China slightly opened itself up to the West in order to gain membership to the World Trade Organization (WTO). As a result of economic reforms, China is growing at an extremely overheated rate and the risk of a 'bubble' is high, emphasizing the need for strong and modern economic policy. Some aspects of economic reform have moved slowly though, and as a result, in 2003 the government stripped the PBOC of its regulating responsibilities, handing them over to the newly created China Banking Regulatory Commission. Another recent economic reform restructured the PBOC into a system similar to that of the Federal Reserve. Until then, the PBOC was comprised of nearly 2,400 local branches, often leading to corruption by the local governments and the doling out of undeserved, bad loans. Under the influence of former Prime Minister Zhu Rongji, the PBOC was divided into nine regional sections that crossed provincial borders in an effort to reduce corruption and to make oversight simpler. However, the economy continues to heat up and the need for more economic reform is even greater.

Although the structure of the PBOC is similar to that of the Federal Reserve, there are many significant differences between the two institutions, the most important of which is the bank's independence. All decisions of the PBOC must be approved by the State Council, which tremendously limits its power to fulfill its objectives. The bank's main task is to maintain China's monetary policy. It also prevents and resolves financial risks, and safeguards the nation's financial stability. However, it is one of its smaller tasks, the managing of the Yuan's (Renminbi) production and exchange rate, which recently captured headlines.

Revaluation of the Yuan

In 1994, China pegged its exchange rate at 8.7 Yuan to the dollar, and immediately saw their exports surge. The PBOC chose the dollar because the U.S. is a large, stable economy running on a huge surplus. In the first half of 2004 alone, the U.S. purchased a whopping 20.8% of China's exports and China's current account balance with the U.S. has increased 582% over the past nine years. In order to keep its exchange rate fixed, China constantly intervenes in the foreign exchange market and buys U.S. dollar securities. In order to prevent even higher numbers, the U.S. imposed certain trade barriers against China.

While the fixed exchange rate greatly benefited China, their trading partners (especially the United States) did not enjoy the policy, as cheap Chinese imports were replacing domestic products and cutting local jobs. In the U.S. the exchange rate was blamed for creating its huge trade deficit. Many leaders called upon China to revalue the Yuan and loosen the tight band which China placed on its currency. Some of the most vocal opposition came from the United States where Senator Charles Schumer wanted to impose a heavy tariff on Chinese goods and other political leaders wanted China to be labeled a currency manipulator by the Treasury Department. Their call was answered on July 21, 2005 when China decided to slightly revalue their currency by pegging the Yuan to a 'basket' of currencies, granting the Yuan some sorely needed flexibility against the dollar. Unfortunately, the slight revaluation did not prove itself a panacea, as evidenced by the continual rise of the U.S. trade deficit and China's economy remained overheated. This led to calls for further revaluation of the Yuan and became such a hot topic that it was discussed at the G-7 summit in 2006.

The prevailing belief is that further revaluation would yield dramatic effects on the currency markets. For example, since China would be selling off some of its dollar assets in exchange for other currencies in the 'basket', the dollar would be expected to depreciate. Similarly, the Euro would be expected to appreciate because China will increase its Euro reserves by buying more Euro assets to add to its 'basket'. However, the currency that is expected to experience the most activity as a result of a revaluation is the Japanese Yen. One reason is that Japan is one of China's main export competitors and if the price of China's goods were to increase, it would reduce their advantage over Japanese exports. This would make Japan's exports more appealing to the rest of the world, providing a boost to their economy and potentially a boost to their currency. Second, since speculators cannot trade the Yuan, in order to express their views of the Yuan they trade the Yen. Therefore, if the Yuan is expected to appreciate then the Yen will as well. Finally, if China continues its 'basket' of currencies, it will likely increase its holdings of Yen, which would also cause the Yen to appreciate. Due to the potential drastic effects on the market and overall global political climate, it is important to listen for any news or hint of further revaluation from China's political and economic leaders.

Current Governor: Zhou Xiaochuan

Zhou Xiaochuan was born in January 1948, and was appointed Governor of the People's Bank of China in December 2002. Raised in a politically well-connected family, Mr. Zhou received his PhD in economic engineering from the prestigious Quinghua University in 1985. Subsequently, he spent years working for the government and state-owned banks in various positions, where he became friendly with Premier Zhu Rongji and other powerful political figures. In 2000, many suspected that Mr. Zhou would become the next governor of the PBOC, but instead he was named head of the China Securities Regulatory Commission ("CSRC"), a position which earned him the reputation of being a staunch reformer.

As head of the CSRC, Mr. Zhou was faced with overseeing a market rife with corruption and shady practices. Mr. Zhou managed in just a few short years to change the corrupt system. Mr. Zhou pushed for greater disclosure of listed companies and even oversaw the first company delisting, earning him the nickname 'the flayer'. Another highlight of his leadership was the introduction of foreign investors into the Chinese markets, enabling them to buy Chinese securities through special funds and partnerships. Alas, no reformer is without his critics and Mr. Zhou drew the ire of many Chinese anti-Western investors by placing Chinese that were educated abroad (called 'sea-turtles') into various financial leadership posts. Also, as head of the CSRC he sold some state-owned assets, which promptly caused the markets to crash, angering investors even more.

His successes at the CSRC convinced the Chinese leadership that he was capable of tackling the many problems facing the PBOC if named governor. In addition to handling foreign pressure to revalue the Yuan, Mr. Zhou also faces an overheated economy, rising inflation and troubling news from the state-owned banks at home. An estimated 40% of the loans issued by state-owned banks are considered Non Performing Loans (NPLs), which could eventually lead to a nationwide recession. In order to combat these problems, Mr. Zhou raised interest rates and increased the amount of required reserves that the banks are forced to keep at the PBOC. He was also instrumental in the slight revaluation of the Yuan. Unfortunately, China's economy continues to grow at an astronomical rate, increasing fears of a 'bubble' waiting to burst and the pressure from abroad to revalue the Yuan has intensified. Mr. Zhou's task continues to grow more difficult, but many believe that he is capable of overcoming these problems. How he handles these issues will determine whether China continues its ascension into the upper echelons of world economies or if it collapses and becomes another sad, economic bust. On a more personal level, it will determine whether or not Mr. Zhou's hopes of ascending to China's Premiership are realizable.