The Chinese stock market reacted strongly to the rumors of Zhou Xiaochaun, the Governor of the People’s Bank of China, stepping down triggered by a report in the Wall Street Journal.

The market registered an 18 month high though bonds remained steady, as it is speculated that someone with a more accommodative monetary policy will replace Zhou, who has been reform-minded.

Zhou, who has insisted on introducing pro-market reforms inspite of a slowing economy in the recent months, is likely to lose his job if the rumor mills are to be believed.

Zhou, who has led the central bank for the world’s second-largest economy since 2002, has been the chief architect of the 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.

This replacement is purportedly being done with the tacit approval of the Chinese President, Xi Jinping. Xi wants more allies in top government, military and Communist Party positions, and personnel changes were expected around a major party meeting next month, as suggested by the media leaks so far.

In a statement to the Wall Street Journal, the PBOC clearly mentioned that the 66 year old Zhou would not be stepping down soon.

The top contender for Zhou’s position is Guo Shuqing, a former banker and securities regulator who is currently governor of eastern Shandong province.

Christian Lundblad, professor of finance at the University of North Carolina at Chapel Hill, said if Zhou left it would increase uncertainty about whether China wanted to slow the pace of reforms designed to open the economy.

“If this means they are going to be moving away from that in the face of concerns about a slowdown (in economic growth), I’m disappointed,” he said.

The Chinese Economy – A Stumbling Giant

The Chinese economy has been in the throes of a crisis since the last few months. There have been reasons to believe that it might not be able to register a growth rate of 7.5% as anticipated by the government, raising investor expectations that policymakers would further loosen fiscal and monetary policy to stoke growth.

Senior Chinese leaders, including their premier Li Keqiang, have however dismissed the chances of easing of policies, saying that china cannot depend on easy credit to lift its economy. He hinted on making only targeted adjustments where required.

“We do not think a change in leadership at the central bank would suggest anything about a switch in the orientation of macro-economic or monetary policy,” Nicholas Consonery, director for Asia at the Eurasia Group, said in a note.

“If anything the rumors circulating about sharp divisions over monetary policy more reflect the government’s inability to manage its own message than about Zhou’s retirement.”

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