Macroscope | Why monetary easing is not so easy in China

As Chinese leaders attempt to guide their slowing economy into a soft landing, they’re counting heavily on People’s Bank of China Governor Zhou Xiaochuan to keep conditions stable.

It’s a daunting task. Firming US growth is increasing the odds the Federal Reserve will boost interest rates soon. Europe, meanwhile, is on the precipice of renewed turmoil as Greece spars with euro-area finance ministers. Japan is limping out of recession slower than hoped (growing an annualized 2.2 per cent in the fourth quarter), raising the chances of additional Bank of Japan stimulus.

With 560 basis points worth of monetary ammunition to use before interest rates go negative, Zhou would seem well-armed for the challenge. But what if he has fewer options than optimists think?

Comments over the weekend by Guan Tao, head of international payments at the State Administration of Foreign Exchange, suggest Zhou’s ability to ease may rapidly be evaporating. The problem? Fast-rising "uncertainty and instability" for capital shifts – conditions, Guan warns, that are eerily reminiscent of the 1997-1998 Asian financial crisis.

As China’s currency watchdog, SAFE normally operates under a cloud of secrecy. For Guan to speak out so publicly suggests there’s good reason to be worried about the kind of sudden and massive outflows that flattened Indonesia, South Korea and Thailand nearly two decades ago.

or the last 12 years, the PBOC has faced exactly the opposite problem: what to do with all the cash flooding into the country as Tokyo, Washington and Frankfurt slashed rates. That pumped up China’s money supply and required some fancy monetary footwork from Zhou, who had to introduce special securities to mop up liquidity. Now, with the dollar rising and the yuan coming under pressure, incentives to move money out of China are growing. The government’s anti-graft crackdown is adding to the problem, as crooked cadres scramble to shift their ill-gotten gains abroad.