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China central bank head to spur reforms through tough waters

China's central bank governor Zhou Xiaochuan answers a question at a news conference during China's annual session of parliament, in Beijing
China's central bank governor Zhou Xiaochuan answers a question at a news conference during China's annual session of parliament, in Beijing

By Kevin Yao

BEIJING (Reuters) - Zhou Xiaochuan's grey hair identifies the Chinese central bank chief as someone willing to do things a bit differently to the ranks of bureaucrats with dyed-black hair in Beijing's other top organs of state - and the struggle he faces getting things done.

Zhou, who took control of the People's Bank of China in 2002, is the architect of broad financial reforms that have spawned fledgling capital markets, liberalized some interest rates and broken the peg between China's yuan and the U.S. dollar - a step along the path to turning it into a global currency on a par with the greenback.

But formidable challenges lie ahead as the country has entered a stage where big changes face push-back risks from vested interests, especially from state giants in key sectors.

"The reform task for Zhou will be very arduous and it may not even be completed during his tenure," said Xu Hongcai, senior economist at China Centre for International Economic Exchanges, a top government think-tank in Beijing.

His tenure was given an unorthodox extension on Saturday by China's newly installed political chiefs - headed by President Xi Jinping and Premier Li Keqiang - in what is seen as a bid to burnish the pro-reform credentials of the new Communist leaders.

Zhou, 65, is at the mandatory retirement age for cabinet-ranked officials, such as central bank governor. But his election as a deputy chairman of parliament's top advisory body on March 11 gave him "national leader" status and cleared the way for Zhou to stay on at the PBOC.

That makes Zhou not only the longest-serving central bank chief since the establishment of the People's Republic of China in 1949, but among the longest-serving in the world.

On the other hand, it does nothing to reduce the scale of the battle he must fight - to make China's interest rate and currency regimes more market-driven and to open up the restricted capital account - that is seen as full of pitfalls by political hardliners and vested interests alike.

Expanding capital markets would end subsidized access to funds for state firms while expanding investment options beyond the real estate market that local government officials have for years used to fund pet projects and boost promotion prospects.

Zhou's Western-style hobbies - an avid tennis player, connoisseur of high-end whisky and an opera buff known to sneak out to performances while on official visits overseas - and the belief that China has much to learn about market reforms from the United States have made him vulnerable to ideological attacks.

Zhou has been the object of ire from conservatives within the Communist Party, as well as the occasional flare-up of nationalistic sentiments in Chinese cyberspace.

"He has been criticized by some for paying too much attention to what foreigners say (about China)," said a central bank official who requested anonymity due to the sensitivity of the matter.

But his re-appointment signals that the trained engineer is regarded by political chiefs as someone likely to succeed in delivering reforms to put China's economy on a more stable long-term footing - and keep the party in power.

Zhou still needs to beef up the PBOC's clout in internal policy wrangling, as the central bank lacks the independence of institutions like the U.S. Federal Reserve and needs cabinet approval to change interest rates or the value of yuan.

His advocacy of a greater role for the market in setting borrowing costs and currency rates was rooted in his early academic career in the late 1980s and, as a protégé of former Premier Zhu Rongji, he helped draw up the blueprint to wean the economy off central planning.

Zhou, a renowned economist, has promoted a number of influential overseas-educated Chinese scholars to key posts. Among them, Yi Gang, who holds an economics PhD from the University of Illinois, is tasked with managing the country's $3.3 trillion foreign exchange reserves - the world's largest.

"Governor Zhou's faith in the free market is deep in his bones - he has been consistent in reforms," said the central bank official.

(Reporting by Kevin Yao; Editing by Nick Edwards and Neil Fullick)

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