China's Central Bank won't do dirty work

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.