Central Banking Publications

-- 14 March 2007 --

Newsmakers deals with aspects of central banking that are frequently neglected. Daily coverage of general central banking developments is available to subscribers through our website


China had investment bankers everywhere drooling with anticipation when the finance minister, Jin Renqing, finally confirmed last Friday that the country will establish an investment company to make more profitable use of its $1 trillion in foreign currency reserves.

"We can achieve more profit from the investments," Jin said at a news conference. "We are now preparing the organisation of this new corporation.”

“The biggest priority is safety, and under the principle of security, we will try to increase the efficiency of management and the investments’ returns,” he said.

Although the finance minister gave no details, it is widely expected that $200m to $300m will be transferred to the new agency, which will be empowered to invest in a wider range of assets than available to the central bank. Newsmakers understands that the governance arrangements, mandate and organisational structure of the new agency are now being finalised by the ministry of finance and other state agencies in Beijing.

The People’s Bank is keeping a wary eye on developments! But this is China, and both agencies will be responsible ultimately to Party organs of the State Council.


Lou Jiwei, nominated to be head of the new agency, is a typical figure of a new generation of technocrats in China, whose careers normally developed from research/consultation to public administration. He was born in 1950. Before going to university, he was enlisted in the navy for four years and then as a worker in a steelmaker in Beijing. Then he was lucky enough to get higher education in university right after the cultural revolution.

Lou studied computer science in Tsinghua University (bachelors) and economics in Chinese Academy of Social Sciences (CASS, masters). After graduation from CASS in 1984, he took research positions in the State Council and the CASS on macroeconomic management and fiscal policy before being appointed in 1988 the duty director of Shanghai's System Reform Office, an important government institution overseeing the local reform process. From 1992 to 1995 he was the head of the macroeconomic department of the National System Reform Office. He became a senior figure in Chinese government when he became a vice-governor of Guizhou province between 1995 and 1998, and since then he was promoted to the ministry of finance as deputy minister. Over the years Lou has published widely on China's macroeconomic issues, including fiscal and monetary policies, in favour of a greater role of market in resource allocation. He also has experience in public administration at a senior level, holding a ministerial ranking for over ten years.

The new investment agency he is expected to head will report directly to the State Council, not a subordinate of the ministry of finance. Lou has been appointed a vice secretary-general of the State Council and didn't borrow a team from the ministry of finance in the preparation of the new agency. The exact governance of the agency is unclear at the moment, in terms of its relations with the People’s Bank of China and SAFE. Does Lou's appointment indicate the ministry of finance has gained the upper hand?


With the creation of the new agency, the funds controlled by such sovereign wealth managers globally will rise to an estimated $2 trillion.

So far, little has been published about the operation of such funds. However, a new book entitled Sovereign Wealth Management to be published at the end of this month by Central Banking Publications will fill this gap.

To find out more about the book and its “Dream Team” of authors follow this link


Join central bankers and supervisors in an exciting and challenging week of discussions with fellow professionals from around the world.

Six training courses/seminars to be held March 25 - April 5 cover key aspects of the work of central bankers and other officials engaged in making public policy towards financial markets. For programme details and how to register, please click on the following link:

Courses focus on

Effective governance
Financial stability
How to combat money laundering
Banknote and currency management

These seminars are again to be held in Cumberland Lodge in Windsor Great Park (a former royal hunting lodge), with rapid access to central London. For more information please contact Ikuko Hiroe, the Conference Director, on


NIL PROFITS FOR THE ECB…  [NdW: without proper accounting for seigniorage...]

While America’s and China’s central banks vie for the title of the most profitable bank in the world, one central bank certainly not in the running is the European Central Bank (ECB). Frankfurt’s finest booked "a net profit of exactly nil" last year, as in 2005. Provisions against foreign exchange rates, interest rates and gold price risks eliminated a surplus of €1.379 billion ($1.8 billion). In 2005, a surplus of €992m was offset by similar provisions.

The ECB's regular income arises mainly from investment earnings on its holding of foreign reserve assets and its paid-up capital of €4.1 billion, as well as interest income on its share of the euro banknotes in circulation.

Interest income rose to €1.972 billion in 2006 from €1.27 billion in 2005.


The ECB paid remuneration of €965m to the national central banks of the eurozone on their claims in respect of the foreign reserve assets transferred by them to the ECB. Administrative expenses on salaries and related costs, rental of premises, and goods and services amounted to €332m, up from €316m in 2005.

At the end of 2006, the ECB employed 1,367 staff, including 138 at the managerial level, compared with 1,351 a year earlier.


Toshiro Muto, a deputy governor at the Bank of Japan, is the leading candidate to be the next governor, according to Japanese economists.

Of 24 prominent economists recently polled by Jiji Press, 19 said that Muto is the frontrunner to succeed the current governor, Toshihiko Fukui, whose term of office expires on 19 March 2008.

Heizo Takenaka, now professor at Keio University and former minister of internal affairs and communications, is another leading contender, with BOJ deputy governor Kazumasa Iwata is also in the field.

However, among the economists surveyed, only five said that they wanted Muto to be the next BOJ governor, while three expressed support for Iwata, three backed Kazuo Ueda, dean of the Faculty of Economics at the University of Tokyo and former central banker, and two supported Takenaka.


Heizo Takenaka himself has seen fit to criticise the central bank for increasing interest rates despite continued deflation.

"Deflation has still continued in Japan," he said in a recent interview with Kyodo News. "The biggest problem is an interest rate hike in the absence of economic overheating or inflation."

Takenaka warned that Japan’s recent interest rate hike could herald an appreciation of the yen against the dollar and dampen Japan’s real economy with deflation becoming more serious. "Japan could plunge into a vicious circle of a yen rise, worse deflation and a further yen rise," he said.

The Bank of Japan has not specified an inflation target and remains unaccountable for the results of its decisions, he said. "The imbalance between its great power and its limited accountability is a problem."

"In order to maintain its independence, the Bank of Japan should set an inflation target," he said.


The economic policy director of the Central Bank of Brazil, Afonso Bevilaqua, resigned on 1 March leading to speculation that this was related to recent disputes over the direction of monetary policy. However, this represented merely a “routine change” that won't alter the direction of policy at the institution, the finance minister, Guido Mantega said on Friday 2 March.

"This is a routine change," he said. "It's absolutely within the routine of what has happened at the central bank for some time."

Mantega denied the director's exit had any political motivations within the government related to recent criticisms of tight monetary policy and lower-than-hoped-for economic growth results.

"Monetary policy isn't determined by one director," he said. "We have an inflation targeting regime whereby the National Monetary Council establishes what target the central bank will pursue. Nothing will change."


However, the Brazilian media had been speculating for some time that Bazil’s president, Luiz Inacio Lula, would be demanding personnel changes at the central bank. Like so many politicians around the world, Lula wants a central bank with "technical autonomy" concerning monetary policy, but one that “responds” (reports) directly to him administratively and politically. Somehow, the central bank’s president, Henrique Meirelles, manages to hang on to his job, but Afonso Bevilaqua was being fingered for weeks before his departure.


Brazil will continue to build up its reserves as long as global imbalances support a steady flow of dollars into the country, central bank director Paulo Vieira da Cunha told analysts in New York.

"I don't think we will be building up reserves for ten years ... but we are comfortable with our policy right now," Vieira da Cunha, who heads the international affairs department at the central bank, told analysts.

He explained that Brazil, like many other countries, keeps intervening in the foreign exchange market to counteract the effect of "global imbalances" caused by a mismatch in world interest rates.


Welcome Simon Johnson, a Brit, the IMF's new chief economist. Simon may need cheering up, if he has read the rest of the media coverage about his appointment, which has dwelt on the difficulty the Fund had in making the appointment and all the other economists who were reportedly offered the job first and who turned it down. Soon every self-respecting macroeconomist will need to be able to claim they turned down the offer of chief economist at the IMF. How boring.

Johnson, 44, is not a macroeconomist in the usual mould but an expert in entrepeneurship and the institutional foundations for growth. He is currently the Ronald A. Kurtz professor of entrepreneurship at the Sloan School of Management at MIT. His research interests include corporate governance, new stock markets and even venture capital; altogether a refreshing change from the identity-kit American-trained macroeconomists that have hitherto usually been chosen to lead the Fund’s economic team.


Central banks are engaging in more active diversification strategies in response to rising risks, a survey of reserve managers published on Monday 26 February showed.

These risks now include prominently geopolitical and security risks along with concerns about global imbalances and an economic slowdown.

In response to these concerns, central banks are diversifying further in terms of instruments, currencies and markets. Thirty-six per cent have made major changes in their investment guidelines in the past 12-24 months. Eighty-nine per cent say that central banks are not yet approaching the limits of feasible and practical diversification.

Most expect the total of world reserves to continue to rise rapidly.

Over one-half of respondents believe that there is a case for central banks to invest in equities, although few central banks actually do so at present.

At the same time, some traditional safe havens are regarded more favourably. Sixty-three per cent of respondents say that gold has become more attractive as a reserve asset.

A sizeable minority, over one-quarter, also endorse the idea of investing reserves in commodities (other than gold) or commodity tracker funds.

Click here for more details about RBS Reserve Management Trends 2007


Venezuela will speed up plans to pare down holdings of dollars in its international reserves to reduce the nation's dependence on the US, according to central bank president Gaston Parra. The central bank started its diversification plan in 2005, Parra said, and would now speed it up.

''We are accelerating the process of diversification of our reserves,'' Parra said from Caracas. ''It's a programme to protect and diversify our national wealth; it's been implemented meticulously and will continue to be.''


The Central Bank of Russia has released the first survey on the management of Russia’s currency reserves, totalling $300 billion, the third largest in the world. The report reveals that 51.5% is kept in the US dollar, 38.6% in the euro and 9.8% in the UK pound while 0.2% is in yen and the Swiss franc.


The Mexican Senate has rejected President Felipe Calderon's nominee for deputy governor of the Bank of Mexico. The Senate approved a measure passed by the Finance Committee to oppose the appointment of Carlos Hurtado, a former deputy finance secretary. Opposition senators argued that Carlos Hurtado was in charge of government spending increases last year that led to inflation surpassing the central bank's target.


Kenya’s president, Mwai Kibaki, appointed economics professor and think-tank director Njuguna Ndung'u to be head of the Central Bank of Kenya to replace the former governor, who has been suspended. Ndung'u, 48, has a doctorate in economics from the University of Gothenburg, and has worked for the IMF, World Bank and Economic Commission for Africa. Dr Andrew Mullei stepped down after being charged with abuse of office in March 2006.

In his first remarks on taking office, Ndung’u took the usual official line:

"Central Bank of Kenya should not blindly follow IMF or World Bank policies, but seek partnerships once it develops policies that are consistent with the country's development agenda," said the professor. "We are going to seek our own solutions and then seek developing partner support."

Since 2004, the Treasury has declined to factor in money from donors, especially from the two international lenders -World Bank and IMF-, citing the stringent conditions attached to the money, which the Treasury says are not in line with the country's growth objectives.


Dutch central bank chief Nout Wellink, who has been criticised for expressed concerns about hedge fund TCI's push for a break-up of ABN AMRO, has defended his intervention as being necessary to ensure a sound banking system.

British TCI Fund Management said in a letter on February 22 to ABN AMRO that the bank should explore options to merge, sell or spin off some of its assets, or even the whole business, as it is undervalued.

Nout Wellink intervened to say that the hedge fund was going too far in calling for a break-up of the Dutch bank ABN AMRO:

"TCI's letter suggests to say: see what you (ABN) see fit to sell, but send the money to (TCI). To us, that is a bridge too far."

The Dutch central bank would not allow the financial markets to be upset and would follow ABN's case closely, Wellink said.

"Never before has a hedge fund put such big pressure on a large bank. This can have repercussions far beyond our borders," Wellink said, adding that the central bank would enforce an orderly process if a reorganisation of ABN was called for.

This aroused strong criticism, especially in the Anglo-Saxon media. A Wall Street Journal editorial even compared him with the disgraced Antonio Fazio, the former chief of Italy's central bank, who stepped down after showing favouritism during ABN's 2005 takeover of Italian bank Antonveneta.

In the letter published by the Wall Street Journal Europe 7 March, Wellink rejected criticism over his remarks, where he warned that putting pressure on a large bank such as ABN could threaten financial stability:

"We are not a country, and this is not a bank, that pursues a protectionist policy. However, we must see to it that everything proceeds within the bounds of a sound banking policy. It is the law that provides support."


Gerrit Zalm, outgoing Dutch finance minister, said in an interview published on 14 February that no other eurozone countries share France's wish for politicians to exercise more control over the ECB.

"It's a typical French debate," he said in an interview with the Financial Times. "After the presidential elections it is over. There is no enthusiasm for this in any other country."

In the interview Zalm described suggestions by French presidential frontrunners Nicolas Sarkozy and Ségolène Royal that the ECB should take instructions from the politicians as "a waste of time".

Zalm also said he does not agree with French-led demands for the "euro group" of eurozone finance ministers to have a more active role in exchange rate policy.


Andras Simor, formerly chief of the Hungarian arm of auditing and consulting giant Deloitte, has become governor of the central bank. Hungary’s prime minister Ferenc Gyurcsany said that the nomination showed the government respected the bank's independence. Simor, 52, has been chairman and office managing partner at Deloitte & Touche Hungary since 2002. Before that he spent four years as the chairman of the Budapest Stock Exchange.

The current governor, Zsigmond Jarai, appointed in 2001 while the current opposition party, Fidesz, was in power, has been a strong critic of the government's economic policy.

Ferenc Karvalits is to be the deputy governor and a member of the monetary council responsible for economics and monetary policy, as well as market operations and statistics. Karvalits used to work at the central bank under György Surányi (the governor before Járai).


Geldymurad Abilov took over as chairman of the Central Bank of Turkmenistan on Thursday 15 February. The Ashgabat correspondent of reported that the appointment was made for a six-month probationary period.


Alastair Clark, adviser to the governor of the Bank of England on financial sector issues, is to retire from the Bank of England at Easter after nearly 36 years’ service.

Mr Clark has been a member of the Bank's senior executive team for the past ten years and, before taking on his current role, was for seven years executive director for financial stability.


Slovenia's parliament on Friday rejected the nomination of Andrej Rant for central bank governor. Rant, at present a deputy governor, lost out in a 34-38 vote in the 90-seat chamber.

Slovenia's president, Janez Drnovsek, nominated Rant for the top job at the central bank after parliament rejected his first nomination of the current central bank head, Mitja Gaspari, for a second six-year term of office in a tight vote last month. Gaspari's current term of office expires on March 31. Perhaps it will be third time lucky for the eurozone’s newest member.


Fakhruddin Ahmed, a former governor of the central bank, has become head of the caretaker government of Bangladesh. The caretaker government is supposed to be preparing the ground for elections, but these are not expected to be held anytime soon.


The central bank governor, Gideon Gono, has given a vivid account of how the central bank is under siege from government departments desperate for hard currency. He told a parliamentary group that the central bank receives daily calls from state food and petrol distributors, the state airline, the state railway and power utilities, all demanding dollars to pay for imports. But he said the central bank’s priority was to allocate hard currency for imports of maize to avoid a food crisis.

“If we were talking about local currency, I would say, ‘Don’t worry, in the next 30 minutes we will print money’”. But, he added, he could not print US dollars or British pounds.

In the following weeks, the central bank was reported to be buying aggressively from the parallel market to raise cash for unspecified commitments, driving the local currency down to Z$9,500 to the US dollar last week from Z$6,600 the week before.

It weakened further to Z$17,500 against the British pound, and to between Z$1,300 and Z$1,350 to the South African rand. The local currency had opened the year trading at Z$3,000 and Z$5,000 to the greenback and British pound respectively.

Gono in January refused to devalue the local unit, saying devaluation was unlikely to result in "planeloads" of foreign currency into the country. Eight devaluations since he assumed office had failed to give any spark to the distressed foreign currency market, he said. He kept the official rate fixed at Z$250 to the benchmark US unit, the rate he had fixed in July from Z$101 to the US unit.

The inflation rate is expected to top 5,000% at an annual rate by year-end, if not before.


Naturally, in such a febrile atmosphere there are rumours of a possible coup d’etat. To some observers, the central bank governor appears one of the few people with the credibility to become president.


Belgium’s central bank may finally have drawn a line under the issue of profit distribution, after a recent ruling in Brussels. The case concerned the transfer to the treasury of capital gains on sales of gold carried out between 1996 and 2002. Minority shareholders opposed the transfer of the funds, claiming a right to a share of the gains. A commercial court in Brussels has now rejected the claim as without foundation.

The case could be brought because Belgium's central bank is a listed company, traded on Euronext. Half of its shares are traded freely and the state owns the other half.

This was the fifth case to be won by the bank in tussles over shareholders' rights.


Randall Kroszner, a governor at the Federal Reserve Board, has argued that International Monetary Fund interventions in some emerging market economies might create a reverse moral hazard that could lead to useful reforms. It is often said that the prospect of bailouts from institutions like the Fund encourages reckless policies. However, often "things got so tangled up" after the IMF gets involved in a country, that emerging-market countries "responded the opposite way" by developing large reserves and better fiscal discipline, in order to avoid going to the Fund at any cost. In this way the Fund might actually do some good – by mistake, as it were.


The growth of huge public sector funds and official wealth is a major development in international finance that all participants in today’s capital markets need to know about. Sovereign Wealth Management is the first book-length study of how vast and expanding pools of nationally-owned wealth is – and should be – invested. The book, edited by Jennifer Johnson-Calari of the World Bank and Malan Rietveld of Central Banking, features a world-class line-up of authoritative authors expressing their views on a topic on which, despite its increasing significance, very little has been written.

The book is the first to examine the key issues of sovereign wealth management in depth:

How are these funds managed?

What are their objectives, mandates, and their relationship with finance ministries on the one hand and the private sector on the other?

How could their asset allocation and risk frameworks change in future?

What will be the implications for financial markets?

Peter Fisher, former head of reserve management at the New York Fed, says:

“The insights of this extraordinary collection of experts, policymakers and practitioners have been brought together in this one volume for your benefit. You would do well to read their essays carefully, learn from their experience and heed their advice”.

Sovereign Wealth Management is now available for sale at


Does the venerable Alan Greenspan risk making a fool of himself by repeatedly making comments on the outlook for the US economy that upstage and differ from those of his successor, Ben Bernanke? Or may Bernanke on the contrary welcome such freelance interventions – which may give warnings, for example about recession risks, that the current chairman would like to make in public but can’t? Is Ben embarrassed, or is it good clean fun?

Certainly it is hard to think of any other leading economy where an immediate past governor of a central bank would feel free to make public comments on such sensitive topics (on reflection, perhaps “free” is not quite the word for Alan, see following note). One cannot imagine Eddie George going head to head with Mervyn King or the Monetary Policy Committee, can one? In Japan it would be unthinkable, as surely in the ECB too.

But America, as ever, is another world. Funny place.


Talking of Geenspan, Newsmakers hears from reliable sources that he asked for a fee of $200,000 for participating by video link at a conference in Beijing. When they objected that China is a poor developing economy, he reduced his ask to $150,000.

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(c) Copyright, Central Banking Publications Ltd, 2007