At a moment of peak uncertainty about the direction of China’s economy, People’s Bank of China (PBOC) Governor Pan Gongsheng is surprising many by speaking in unusually direct terms.
Some of the ambiguity of the “Xi Jinping thought” era is a government big on soaring reform rhetoric and fuzzy on nuts-and-bolts specifics. It’s here where Pan’s burst of economic realpolitik is both refreshing and telling.
The bottom-line message: kindly give China some space and tolerance to pull off modern history’s greatest effort to transition away from property and infrastructure to new drivers of economic growth. Oh, and that period of 8-10% annual growth? It’s not coming back.
“The traditional model of relying heavily on infrastructure and real estate might generate higher growth, but it would also delay structural adjustment and undermine growth sustainability,” Pan told bankers in Hong Kong on Tuesday (November 28).
He added that “the ongoing economic transformation will be a long and difficult journey. But it’s a journey we must take.”
Pan went on to say that “China’s real estate sector is searching for a new equilibrium” to achieve “healthy and sustainable growth” of the “high-quality” variety.
Nor did Pan shy from discussing the biggest potential cracks in China’s financial system. He admitted, for example, that financially fragile regions in the west and north of the country may have “difficulties servicing local government debts.” Expect more defaults, in other words.
Such off-script admissions of turbulence to come are relatively rare in official Communist Party circles. Normally, the top-down impulse in the Xi era has been to project an image of economic omniscience and omnipotence. As such, Pan’s foray into straight talk is useful, intriguing and timely.
On Thursday, China’s National Bureau of Statistics released fresh signs that the manufacturing and services sectors shrank in November, fanning expectations for increased state support as the economy faces intensifying headwinds.
The manufacturing purchasing managers index dropped to 49.4 while non-manufacturing activity slid to weaker than expected 50.2.
Granted, central bankers as a profession tend to speak in vague and non-committal ways. Obfuscation, in other words, is a monetary policymaker’s tool — their modus operandi — to keep all options open at all times.
A top practitioner of the discipline was Alan Greenspan, who chaired the US Federal Reserve from 1987 to 2006. As he once joked to a business forum: “If I’ve made myself too clear, you must have misunderstood me.”
Yet Pan is hardly playing rhetorical games as he telegraphs a long, bumpy road ahead. Naturally, this had PBOC watchers wondering if a new, more activist monetary strategy might be in store in Beijing.
Including, perhaps, a pivot toward quantitative easing (QE) with Chinese characteristics. Though the PBOC hasn’t officially gone the QE route, the central bank spent the last few months — Pan took the helm in July — expanding its balance sheet with aggressive lending to banks.
The PBOC’s total assets jumped 8.6% year on year in October to 43.3 trillion yuan (US$6.1 trillion), the biggest increase since at least 2014. Again, neither Pan nor his staff are talking explicitly about QE. And notable PBOC leaders of the past threw cold water on the prospects for Chinese QE.
In 2010, Zhou Xiaochuan, governor from 2002 to 2018, cautioned that QE policies, particularly in the US, were causing havoc globally.
In September 2021, Pan’s immediate predecessor, Yi Gang, warned that runaway, Japan-like asset purchases “would damage market functions, monetize fiscal deficits, harm central banks’ reputation, blur the boundary of monetary policy and create moral hazard.”
At the time, Yi said that “China will extend the time for implementing normal monetary policy as much as possible and there is no need for asset purchases.”
Yet the need for big asset purchases has gone full circle as China’s post-Covid rebound disappoints. China’s worsening property crisis is pushing the PBOC toward more assertive strategies to boost liquidity.
Some of this has been to absorb a boom in government bond issuance to add fiscal jolts to an ailing economy and to support green sector pursuits.
In a report earlier this week, the PBOC said it’s working to “unblock the monetary policy transmission mechanism, enhance the stability of financial support for the real economy, promote a virtuous economic and financial cycle, and keep prices reasonably stable.”
This has the PBOC mulling a strategy of providing upwards of 1 trillion yuan ($141 billion) in cheap financing for construction projects. Under Beijing’s Pledged Supplementary Lending (PSL) program, the PBOC will channel low-cost long-term liquidity to policy banks to boost lending to the infrastructure and housing sectors.
This plan is at least nominally QE-adjacent. Though more targeted than the QE employed by the Bank of Japan, which pioneered the technique in 2000 and 2001, and the Fed, the PBOC’s plan would make large-scale bond purchases behind the scenes aimed at depressing yields.
Economists can’t help but connect the dots and label this expansion of the PBOC’s balance sheet as “Chinese-style” QE.
“Beijing might have finally recognized the need to introduce quantitative easing or money printing for the collapsing property sector,” notes Nomura economist Ting Lu. “We believe Beijing will eventually need to reach into its own pockets, with printed money from the PBOC – such as PSL – to fill up the vast funding gap and secure the delivery of pre-sold homes.”
Economists at Goldman Sachs said in a recent note to clients “we think additional broad-based monetary policy easing is still needed to facilitate the large amount of government bond issuance and improve sentiment towards growth.”
It’s a controversial step, one that divides economists.
In an August note to clients, Robert Carnell, economist at ING Bank, warned that “QE would put the Chinese yuan under further weakening pressure, which it is very clear the PBOC does not want and would make it much harder for them to manage the yuan. It would also raise the risks of capital outflows, which they will also be keen to avoid.”
Count Carnell among economists who think the answer to China’s troubles lies with Xi’s reform team, not earlier PBOC policies. “As for government stimulus policies, these, we think, will tend to be along the lines of the many supply-side enhancing measures that we have already seen.”
Carnell adds that “the way through a debt overhang is not to print more debt, though it may be to swap it out for lower-rate central government debt, or longer maturity debt to ease debt service.
“Enhancing the efficiency of the private sector will also play a key role, though this and all the supply-side measures will take a considerable time to play out. The tiresome chorus clamoring for more stimulus is unlikely to stop in the meantime.”
This week, Xi made a rare visit to Shanghai just as his team unveiled a 25-point plan to reinvigorate private sector innovation and productivity.
Others argue that the end justifies the means. “Some traditionalists would argue that central banks should not engage in asset allocation, except through the interest-rate channel,” said Andrew Sheng at the University of Hong Kong.
“But QE has already proven to be a powerful resource-allocation tool capable of transforming national balance sheets. An innovative, well-planned QE program … could support China’s efforts to tackle some of the biggest challenges it faces,” he adds.
Like central banks in high-income countries after the 2008 financial crisis, “the PBOC could still avail itself of quantitative easing, with large-scale purchases of government bonds giving commercial banks more liquidity for lending,” notes Shang-Jin Wei, a former Asian Development Bank (ADB) economist.
Wei adds that “if the goal is to achieve higher inflation – as is the case in China today – there is no mechanical limit on the additional stimulus that can be applied to the economy through this channel.”
Wei channels Mario Draghi when he argues “China needs the ‘whatever it takes’ approach that the European Central Bank pursued a decade ago when it, too, was facing a debt-deflation spiral. The PBOC should publicly declare a strategy to monetize a big portion of government debt and to incentivize more private equity investment.”
Pan hasn’t done that, of course. And it’s debatable that he will. But as China grapples with an unprecedented property crisis, it will fall to the PBOC to grease the skids via liquidity as local governments dispose of bad debts.
The enterprise will echo the role the BOJ played in the early 2000s to facilitate the discarding of toxic loans undermining what was then Asia’s biggest economy.
Resolving local government debt troubles, made worse by an explosion of local government financing vehicles (LGFVs), is vital to stabilizing China’s $61 trillion financial sector while China Inc is already grappling with cratering real estate markets.
The idea, argues state-run Xinhua News, is to “optimize the debt structure of central and local governments” to improve the quality of national growth.
As China embarks on what Pan calls a “long and difficult journey” of disruption, the PBOC is on the frontlines. “Looking ahead,” Pan said, “China’s economy will remain resilient. I’m confident China will enjoy healthy and sustainable growth in 2024 and beyond.”
Yet as Pan just explained with unusual frankness, “China is experiencing a transition in its economic model” driven by a belief that “high-quality, sustainable growth is far more important” than rapid expansion.
Doing whatever it takes to get there may have China pivoting in ways most never expected – and in ways almost certain to unnerve global markets.
Follow William Pesek on X, formerly Twitter, at @WilliamPesek