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 (PBOC) 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 Mr Zhou still offering only monetary baby steps over the shock-and-awe recently favoured 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 cliche. Mr Zhou's team - well aware that he has a control-obsessed 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 Mr 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 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, Mr Zhou might have some explaining to do. But, for now, his show of independence is a silver lining amid the ongoing turmoil.
Mr Zhou is an economic moderniser without peer in today's Beijing, and a disciple of former premier Zhu Rongji, China's most important reformer since the pioneering Communist Party chairman Deng Xiaoping.
Mr Zhou's top goal has been to get the yuan added to the International Monetary Fund's Special Drawing Rights programme. But unlike other Chinese policymakers 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 recognised 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 shock waves across the globe.
While no one outside a tiny circle in Beijing knows for sure, I'd bet Mr Zhou is primarily responsible for the Aug 11 devaluation that sent shock waves across the globe. But Mr Zhou has been holding his fire since then, even as PBOC staff, 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 per cent.
Part of the reason may be that Mr 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, Mr 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 Mr Simon Grose-Hodge, head of investment advisory for the LGT Group.
Some fear a bad outcome is inevitable. "The risk that our downside scenario materialises - that China's economy will suffer a hard landing - appears to have increased appreciably and is now close to being our baseline assumption," says Ms Clare Howarth of Oxford Economics. "This would mean average GDP growth closer to 4 per cent over the next five years, rather than our baseline forecast of 5.8 per cent." (China's target is 7 per cent).
If so, Mr Zhou's go-slow approach will be remembered harshly. But he seems content to take inspiration from monetary policymakers who avoided pressure to cut rates and spoke truth to power.
Mr Zhou is channelling not just his mentor, Mr Zhu, but also the West's 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.
Mr Xi is facing pressure from the country's economic elites to put off further reforms, and Mr 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.
A version of this article appeared in the print edition of The Straits Times on August 28, 2015, with the headline 'China central bank chief won't do all the dirty work'. Print Edition | Subscribe
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