Zhou Xiaochuan, the head of China’s central bank, the People’s Bank of China, rarely makes public statements.
But with the country’s economy slowing down and driving significant volatility in global markets, and with G-20 world leaders meeting in Shanghai, he made a speech.
Most of his comments echoed past statements. But there was one significant language shift that should change how people talk about the Chinese economy going forward.
He said monetary policy would be “prudent with a slight easing bias.” He also said the economy had more room for easing going forward.
This is key. The Chinese economy is going through the difficult transition from one based on investment to one based on consumer consumption. To get it done, though, the country will have to improve productivity and restructure massive companies with a lot of debt — companies in industries like property and manufacturing that used to drive the economy.
Of course, as this is happening, the government doesn’t want a load of jobless people. It doesn’t want credit events.
So while the government has talked a lot about reform, not much has happened yet. The government has talked about bankruptcy policy, it has talked about reducing excess capacity at debt-laden companies, and it has talked about getting Chinese people to move into empty buildings in third- and fourth-tier cities.
But it hasn’t happened yet, because doing that right now would be too painful.
Keep it going no matter what
China instead has been turning on the spigots to keep money flowing through the economy. It has made it easier for people to buy cars, and it has cut interest rates. It is making money easy, and the same debt-laden corporations that China is trying to delever are just raising more debt in the country’s booming corporate bond market.
Finally, Zhou is acknowledging this dissonance.
After the speech, Bloomberg economist Tom Orlik wrote in a note that while it was “an important rhetorical shift, in fact the language is now just catching up with the reality: policy has had an easing bias since mid-2015.”
This is the first time the government has acknowledged that it is trying and must keep working at it. That means really painful reforms will have to wait until this ship is steady.