NEWSMAKERS - CENTRAL BANKERS IN THE NEWS
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 http://www.centralbanknews.com
CHINA’S NEW AGENCY
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
“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
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.
THE NEW BOSS OF CHINA'S WEALTH FUND
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
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?
SOVEREIGN WEALTH MANAGEMENT – NEW PUBLICATION
With the creation of the new agency, the funds controlled by such
sovereign wealth managers globally will rise to an estimated $2
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
CENTRAL BANKING SEMINAR SERIES - SPRING 2007
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
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 firstname.lastname@example.org
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
Interest income rose to €1.972 billion in 2006 from €1.27 billion in
…AFTER PAYING NEARLY €1bn TO NCBs
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.
MUTO LEADING THE FIELD TO SUCCEED FUKUI
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’S UNHELPFUL CRITICISM
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.
BRAZILIAN ECONOMIST RESIGNS….
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
….AS LULA APPLIES PRESSURE
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 BUILDS UP RESERVES
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.
AN ENTREPENEURIAL ECONOMIST FOR THE FUND
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.
SURVEY CONFIRMS ACTIVE DIVERSIFICATION OF RESERVES
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 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
Click here for more details about RBS Reserve Management Trends 2007
VENEZUELA DUMPS DOLLARS
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.''
RUSSIAN RESERVE COMPOSITION REVEALED
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.
NEW GOVERNOR FOR KENYA
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
"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
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.
WELLINK HITS BACK OVER THE ABN-AMRO AFFAIR
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
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
"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."
ZALM CRITICISES FRENCH CANDIDATES
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.
SIMOR AND KARVALITS FOR HUNGARY
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
Geldymurad Abilov took over as chairman of the Central Bank of
Turkmenistan on Thursday 15 February. The Ashgabat correspondent of
Turkmenistan.ru reported that the appointment was made for a six-month
CLARK LEAVES BANK OF ENGLAND
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 CANDIDATE REJECTED
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.
BANGLADESH CENTRAL BANKER BECOMES PRESIDENT
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.
BELGIAN CENTRAL BANK WINS CASE
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
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
WHEN THE IMF DOES GOOD BY MISTAKE
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.
NEW LIGHT ON SOVEREIGN WEALTH
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,
“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
WHY IS ALAN TEASING BEN?
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
But America, as ever, is another world. Funny place.
GREENSPAN’S EXORBITANT FEES
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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