Time to rein in loose monetary policy
Central bank chief Zhou Xiaochuan is right to highlight the perils associated with calls by local governments for loose monetary policy
Quantity has prevailed over quality for too long in China’s economy. The competitive emphasis at the local level on economic growth at all costs is evidence enough of that. So is the social and economic price to be paid for unbalanced development, such as environmental damage and economic inequality. Beijing has long been aware of the downside of assessing the performance of local officials by GDP alone. But efforts to temper the blind pursuit of growth, while still meeting national targets, have proved largely ineffective. However, recent criticism of unbalanced development by President Xi Jinping, and an attack by the central bank chief on the obsession of lower tiers of government with growth at all costs, could make a difference.
Zhou Xiaochuan, governor of the People’s Bank of China for the past 15 years, says constant calls from local governments for easier money supply and looser monetary policy, regardless of general economic conditions, are the root cause of the country’s financial fragility. Writing on the central bank’s website, he says good times spurred pursuit of rapid growth across industry and government. This prompted demands to turn on the cash taps, resulting in a credit boom and excessive optimism that generated asset-price bubbles. But when the party ended, amid mounting risks and pressure on financial markets, all sides called for the PBOC to come to the rescue with looser monetary policy. Zhou said the resulting distortion of monetary policy was a source of systemic risk because of high financial leverage and the excessive corporate debt it induced. To combat it he called for broadened equity funding and direct finance.
Such blunt public comments from a key official are rare. Two factors set them apart. They come when Zhou is expected to step down soon, suggesting that he has little to lose by speaking out. The other is that his article was also included in the Communist Party’s handbook of official interpretations of policy from the national congress, suggesting his view is a consensus among top leaders.
It is good that the message comes from Zhou. His status and prestige puts the issue under the spotlight. There is a perception the emphasis on stability has been a factor. After Xi’s work report to the party congress highlighting unbalanced development, the question of how to address it is emerging as a big task for the new top leadership team. Distortion of monetary policy is not only a big financial risk to the economy but it undermines foreign investor confidence.
That said, local government has development and revenue issues of its own that drive calls for easier money. They, too, need to be addressed without putting too much pressure on local officials.