Sir Norman Montagu, the Governor of the Bank of England between 1920 and 1942, said 'never explain and never excuse' what you do at the central bank. The Governor of the Chinese central bank, Zhou Xiaochuan, followed that prescription, until last weekend.
The global equity and foreign exchange markets have been badly rattled since August last year, when the Chinese central bank introduced a more flexible market exchange rate regime. The change has opened a Pandora's box of unprecedented pessimism on the Chinese currency.
An estimated US$637 billion left China in 2015, according to the Institute for International Finance, a Washington-based industry group that represents banks and insurers. During the first month of 2016, another US$110 billion left the country. Many hedge fund managers are lining up to short the currency.
The violent market reaction surprised technocrats at the central bank. Didn't the international community always demand that China adopt a more flexible exchange rate regime? Yet when it happened, the global market had a seizure.
China's woes are partly to do with its communication strategy. The People's Bank of China has a nasty reputation for weekend surprise announcements and one paragraph notices. So when it announced its landmark exchange rate reform back in August last year, many analysts and traders interpreted it as Beijing's decision to join the global currency war: boosting export through competitive devaluation.
The central bank hastily arranged for a press conference to explain the decision after the value of the Chinese currency crashed. It was a bit too little and too late. Despite the market gyration, the bank only managed to put up Zhou's deputy to answer questions from journalists.
It's worthwhile to recall some lessons that the US Federal Reserve has learned from its handling of the global financial crisis. The former Chairman of the Fed, Ben Bernanke said in his book, The Courage to Act that one of the most important things he learned was about the need to communicate clearly with markets and the public: [fold]
Financial panics have a substantial psychological element, projecting calm, rationality and reassurance is half the battle,' he said, ' In a financial crisis, the words of government officials carry extraordinary weight.
He explained how the open markets committee, which sets the interest rate, agonised over words such as 'substantive additional action' or 'meaningful additional action' in its policy statement.
Another senior former Fed official made a similar point about the importance of communicating policy to the market and the people. Professor Alan Blinder, the former Deputy-Chairman of the US Federal Reserve, criticised both Bush and Obama administrations for their inability to communicate financial rescue strategy. This is surprise given that President Obama is regarded as something of a modern Cicero. Blinder, who was also an economic adviser to President Clinton, says the dearth of effective communication under both administrations led to an absence of understanding, widespread confusion, and a popular backlash against sound rescue policies such as TARP, the Troubled Asset Relief Plan.
Back to Governor Zhou. In his lengthy interview with the Chinese financial magazine Caixin over the weekend, he specifically mentioned the need to communicate with the market better. 'First of all, the central bank definitely has a clear and strong willingness to improve communications with the public and the market,' he said, 'however, good communication is never an easy thing.'
Those looking to the central bank for reassurance and certainty in the market will be disappointed, says Zhou. 'The central bank is neither God nor magician that could just wipe the uncertainties out. Therefore, sometimes the central bank has to say: excuse us, but we have to wait for new data inputs.'
The weekend interview with Caixin is a good starting point for Zhou. Onshore Chinese currency value jumped on the back of his message of central bank support for the embattled currency. Hopefully he will do these interviews more frequently in future and also with foreign media, given the central importance of China to the global economy.
However, we must realise there is one important institutional obstacle to the Chinese central bank adopting a better communications strategy. It has to do with the central bank's embarrassingly low status within the Chinese bureaucracy. We often forget that the Chinese central bank is not independent like its Western counterparts.
In his excellent book, The Alchemists: inside the Secret World of Central Bankers, Neil Irwin says that Chinese central bankers enjoy relatively low positions in their country's power hierarchy compared to their US counterparts. 'The chairman of the Federal Reserve is easily among the half dozen most powerful US public officials, and arguably number two behind the president. The president of the European Central Bank at times seems like the most powerful person in all of Europe, ' he writes. 'But the governor of People's Bank of China is, by most accounts, not even among the couple dozen most powerful Chinese officials.'
At a time of great uncertainty, it is arguable that the ruling Chinese Communist Party needs to give its central bank more latitude in communicating to the market and having a greater say over foreign exchange and monetary policy.