Dancing in the dark when it comes to China’s debt plan
Policy spat between the People’s Bank of China and the Ministry of Finance reveal the challenges ahead for Beijing
At times, China’s economic policy resembles the superbly choreographed dance sequences from legendary Hollywood musicals such as West Side Story or An American in Paris.
Every detail for public consumption is honed with the main players sticking to the script. The supporting cast glide through their routines without missing a step or a beat. Until now.
In a rare display of dissent, a senior central bank official has called into question China’s fiscal blueprint, triggering a rare public debate on state policy.
Xu Zhong, the director-general of the research bureau of the People’s Bank of China, or PBOC, popped his head over the parapet when he heavily criticized the strategy as Beijing grapples with rising debt and a slowing economy.
“There is ample room for fiscal policy, but evidence shows that the policy is not being implemented actively enough,” Xu said in a speech last week before the text was released to Chinese media group Caixin.
For him to break protocol and fire a warning shot across the bows of the Ministry of Finance, which is in charge of fiscal policy while the PBOC concentrates on monetary issues, is unparalleled.
Indeed, this illustrates that there are conflicting views at the top of President Xi Jinping’s administration when it comes to the economy. Broad policy is being run by Xi’s confidante, Vice-Premier Liu He, a Harvard-educated economist who has taken a tough stand on corporate and local government debt, and is part of the powerful Politburo.
Before he made the speech, Xu would have cleared it with his boss at the PBOC, Yi Gang, the central bank governor. Yi, who was also educated in the United States, is understood to be in Liu’s camp.
As for the Ministry of Finance, it comes under Liu Kun’s remit. Relatively young at 61, he is also chairman of the Budgetary Affairs Commission of the National People’s Congress, the country’s legislature, and was only named as China’s new finance minister earlier this year.
Known as a softly-spoken fiscal reformer, his main brief is to crack down on rising debt at local government level and deleverage state-owned enterprises. It appears this is proving challenging with Xu pointing out that the Ministry of Finance has struggled to get a grip on these problems and has failed to provide “enough support to state-owned financial institutions.”
“Lowering local authorities’ willingness to pay off debt, which would pass the fiscal risks to the financial sector, [are] moves [which] may lead to moral hazard … and even trigger systemic risks,” he said.
While an unnamed official at the Ministry of Finance disputed Xu’s claims, the MoF has yet to issue a formal statement.
Still, at the World Economic Forum in the Swiss luxury ski resort of Davos in January, economic tzar Liu He issued a clear goal for China’s bureaucrats by rolling out a three-year timetable in the war against debt.
“Shadow banking and hidden debt for local governments are serious problems we have to deal with,” he said. “We have full confidence and a clear plan to get the job done.”
Since then, the economic landscape has changed significantly. While reforms continue, Beijing is having to adjust its policy as trade tensions with the US escalate and pressure from the European Union increases to further open up markets.
At the same time, Xi’s government has come under pressure at the World Trade Organization in Geneva for excessive state subsidies and the practice of “forced technology transfers.”
On the domestic front, Beijing is realigning the economy toward valued-added exports by upgrading factories, which will also cater for rising domestic demand in quality products, as well as expanding the service sector.
Infrastructure spending is being heavily scrutinized to curtail excessive debt, while ‘quality, not quantity’ has become the mantra in the corridors of power in Beijing.
But this is all taking place as the economy shows signs of cooling. “Headline official indicators [such factory production, retail spending and infrastructure funding] are now in broad agreement that the economy is losing momentum,” Julian Evans-Pritchard, a senior China economist at research company Capital Economics, pointed out.
The same could possibly be said of Beijing’s economic policy, with officials dancing the dark.