China's Cen­tral Bank won't do dirty work

The Pak Banker - - OPINION - Wil­liam Pe­sek

China's Zhou Xiaochuan is ei­ther the smartest or most reck­less cen­tral banker in the world. Even af­ter its fifth rate cut in nine months on Tues­day, the Peo­ple's Bank of China is run­ning a mon­e­tary pol­icy that's too tight for an econ­omy on the brink. The PBOC is grap­pling with weak­en­ing growth, ex­ces­sive debt and a plung­ing eq­uity mar­ket that's wreak­ing havoc on house­hold wealth, cor­po­rate prof­its and busi­ness con­fi­dence.

So why is Zhou still only of­fer­ing mon­e­tary-baby steps over the shock-and-awe re­cently fa­vored by Bank of Ja­pan Gover­nor Haruhiko Kuroda? It's partly be­cause he wants to pre­vent China's cen­tral bank au­ton­omy from be­ing re­duced to a hol­low cliché. Zhou's team -- well aware that he has a con­trolob­sessed Com­mu­nist Party look­ing over his shoul­der -- wants to make sure Pres­i­dent Xi Jin­ping does his part to re­store China's econ­omy. We'll know soon enough whether Zhou is be­ing reck­less. Many com­men­ta­tors have ar­gued the PBOC should ini­ti­ate quan­ti­ta­tive eas­ing. Af­ter all, China's over­ca­pac­ity and debt lev­els -- the coun­try's lo­cal gov­ern­ments alone owe more than Ger­many's an­nual gross do­mes­tic prod­uct -- cau­tion against a new round of fis­cal stim­u­lus.

If the data on China's eco­nomic fun­da­men­tals and Shang­hai stocks cas­cade lower in the months ahead, Zhou might have some ex­plain­ing to do. But, for now, his show of in­de­pen­dence is a sil­ver lin­ing amid the on­go­ing tur­moil.

Zhou is an eco­nomic mod­ern­izer with­out peer in to­day's Bei­jing, a dis­ci­ple of for­mer premier Zhu Rongji, China's most-im­por­tant re­former since the pi­o­neer­ing Com­mu­nist Party chair­man Deng Xiaop­ing. Zhou's top goal has been to get the yuan added to the In­ter­na­tional Mon­e­tary Fund's spe­cial draw­ing rights pro­gram. But un­like other Chi­nese pol­icy mak­ers, who want to lever­age that sta­tus to in­crease the coun­try's global clout, he wants to use it to spur fur­ther eco­nomic re­forms. He knows that once the yuan is rec­og­nized as a re­serve cur­rency, Bei­jing will have no choice but to ad­here to global eco­nomic norms.

While no one out­side a tiny cir­cle in Bei­jing knows for sure, I'd bet Zhou is pri­mar­ily re­spon­si­ble for the Aug. 11 de­val­u­a­tion that sent shock­waves across the globe. But Zhou has been hold­ing his fire since then, even as PBOC staffers in­clud­ing re­search head Lu Lei call for greater pol­icy co­or­di­na­tion with gov­ern­ment of­fi­cials. The PBOC has of­fered only a mod­est 25 ba­sis point cut in the one-year lend­ing rate to 4.6 per­cent.

Part of the rea­son may be that Zhou wants to avoid ap­pear­ing pan­icky. But, as de­fla­tion pres­sures mount, he also wants to en­sure that all hands from the Chi­nese cen­tral gov­ern­ment are on deck. Rather than ex­ac­er­bate China's prop­erty and as­set bub­bles, Zhou is aim­ing to re­as­sure mar­kets that Bei­jing is work­ing to re­bal­ance the econ­omy in the longer run. "The PBOC would seem to agree, tak­ing a leaf out of the Euro­pean Cen­tral Bank play­book by putting pres­sure on the gov­ern­ment to match its mon­e­tary eas­ing with fis­cal mea­sures," says Si­mon Grose-Hodge, head of in­vest­ment ad­vi­sory for LGT Group.

Some fear a bad out­come is in­evitable. "The risk that our down­side sce­nario ma­te­ri­al­izes -- that China's econ­omy will suf­fer a hard land­ing -- ap­pears to have in­creased ap­pre­cia­bly and is now close to be­ing our base­line as­sump­tion," says Clare Howarth of Ox­ford Eco­nom­ics. "This would mean av­er­age GDP growth closer to 4 per­cent over the next five years rather than our base­line forecast of 5.8 per­cent." (China's tar­get is 7 per­cent).

If so, Zhou's go-slow ap­proach will be re­mem­bered harshly. But, in the mean­time, he seems con­tent to take his in­spi­ra­tion from mon­e­tary pol­icy mak­ers who avoided pres­sure to cut rates and spoke truth to power. Zhou is chan­nel­ing not just his men­tor Zhu, but also the West's most her­alded mon­e­tary mav­er­icks. Those in­clude Euro­pean Cen­tral Bank chief Mario Draghi and Paul Vol­cker, whose fierce in­de­pen­dence dur­ing his stint run­ning the Fed­eral Re­serve from 1979 to 1987 is among the proud­est chap­ters of mod­ern cen­tral bank­ing.

Xi is fac­ing pres­sure from the coun­try's eco­nomic elites to put off fur­ther re­forms, and Zhou is among the few peo­ple in China who has the gravitas to play the role of hon­est bro­ker. It's com­fort­ing to see that he feels up to the chal­lenge.

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