China's central bank, more hawkish on inflation than other parts of the government, has gained more policy-making power in recent months by outmaneuvering pro-growth factions in wrangling over the economic outlook and bank loans.
That will give the People's Bank of China more leeway to tighten policy by further raising banks' required reserves, aggressively draining liquidity through open-market operations and restricting bank lending, according to analysts familiar with the policy debate in Beijing.
China is expected to raise interest rates only a couple of times this year, partly a reflection of the fact that the cabinet, not the central bank, makes the final call on rates and it must balance between rival groups in the government.
The highest echelon of leaders also decides on major changes to the country's currency regime given its political importance, but despite these limitations, the central bank is establishing itself as a stronger player in Beijing as the nearly decade-long term of Governor Zhou Xiaochuan draws to a close.
It was instrumental in tilting the official consensus to fighting inflation from supporting growth late last year, helped by its long-standing warning that rising prices would pose a threat, analysts say.
The central bank's economic foresight is better than other state agencies, including the NDRC, said Gao Shanwen, chief economist at Essence Securities, referring to the National Development and Reform Commission, a powerful planning agency that sets economic targets and oversees investment projects.
That has allowed the central bank to gain the upper hand in the debate over inflation.
While the central bank sounded the alarm bell early last year and moved quickly to tighten liquidity by raising banks' required reserves, the NDRC, which tends to be more pro-growth, insisted inflation would be benign.
The NDRC had to change its rhetoric after inflation continued to accelerate, racing to a 28-month high of 5.1 percent in the year to November. The agency made a quick about-turn to campaign for tough measures to control food prices.
To be sure, no one is saying that the central bank is about to win policy independence, just greater influence.
Every government department has its own vested interest and the central bank has to fight with other state agencies, said Wang Hu, an economist at Guotai Junan Securities in Shanghai.
Another dispute between the central bank and the NDRC was over the bank lending target for 2011, with the former initially proposing a target of 6.5 trillion yuan ($988 billion) against 8 trillion yuan wanted by the NDRC, the Economic Observer reported last month.
The government appears to have split the difference, with local media saying that 7.2 trillion yuan will be the rough target. But with that representing a 10 percent decline from last year's new loan total, the central bank got its way on the bigger issue of whether to tighten or not.
The central bank has also fought a turf battle with the banking regulator over how to exercise day-to-day control of commercial loan issuance.
That more power has been vested in the central bank can be seen in the new dynamic differentiated reserve requirement system that the government plans to use this year to keep lenders in check.
Depending on their volume of lending, banks will face different reserve requirements -- something that the central bank, not the China Banking Regulatory Commission, imposes.
The central bank will have more power to control lending because setting lending targets won't be that effective and there are still some uncertainties in the economy, said Guo Tianyong, an economist at Central University of Finance and Economics.
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The central bank's preference for raising reserve requirements instead of interest rates -- seven times versus twice, respectively, since the start of last year -- is partly because it needs no higher authorization for reserve decisions.
Combined with sustained cash withdrawals in open-market operations, where it also has a free hand, the central bank's tightening has started to seriously bite, with a money market crunch forcing commercial lenders to scramble for short-term funding.
The weighted average seven-day repo rate, the main barometer of short-term liquidity, hovered near a three-year high of 8.2 percent on Monday, more than three times higher than just two weeks earlier.
Most analysts expect inflation, driven by soaring food prices, to stay elevated in the first half of 2011, reinforcing the central bank's position of strength.
But the NDRC is not about to abandon its pro-growth stance. Zhang Ping, the agency's chief, said last month that the shift in monetary policy did not amount to simple tightening.
And the central bank must tread cautiously after facing criticism for over-tightening before the global financial crisis struck the Chinese economy.
In its 2006-08 tightening, it increased lending rates by 162 basis points (bps) and reserve requirements by 950 bps, while letting the yuan rise about 15 percent versus the dollar. Hit by the global turmoil, the Chinese economy slowed sharply.
In its current tightening cycle, the central bank has been more conservative, raising rates by 50 bps and required reserves by 350 bps, and letting the yuan rise less than 4 percent since it was unshackled from its peg to the dollar last June.
The central bank has greater clout as inflation is now the main problem. It may lose that power if growth becomes the main risk, said Jinny Yan, economist at Standard Chartered Bank in Shanghai.