In what is certainly the most important news of the day, the WSJ reports that China's long-serving central banker Zhou Xiaochuan, "the face of the Chinese economy to markets globally" is about to be given the boot.
According to the WSJ, "Chinese leader Xi Jinping is considering replacing Mr. Zhou, say party officials, as part of a wider personnel reshuffle that also comes after internal battles over economic reforms." And while it is true that at the age of 66, Zhou has passed China's retirement age, and his departure will be spun as an old man spending more time with his family, the reality is that this is part of a major Chinese shift in the "balance of power between reformist and reactionary forces, with the momentum for reforms being eroded by the loss of growth momentum in the economy," said Eswar Prasad, a Cornell University China expert.
Zhou's replacement: a career banker, who will do the bidding of, you guessed it, banks, which means "liquidity to the max." Per the WSJ, "The top contender to succeed Mr. Zhou at the People's Bank of China is Guo Shuqing, a former banker and top securities regulator who is currently governor of Shandong, a prosperous eastern province, the officials said."
Guo Shuqing, male, Han nationality, is a native of the Inner Mongolia Autonomous Region. He was born in 1956 and graduated from Nankai University.
Guo worked at the Chinese Academy of Social Sciences prior to becoming deputy head of the State Council's General Affairs Group of the Economic Research Center. In 1995, he began to serve in several capacities on various state commissions involved with economic restructuring. In 2001, he became director of the State Administration of Foreign Exchange. He served as chairman of the China Construction Bank between March 2005 and October 2011. He was also an alternate member of the 17th CPC Central Committee. From 2011 to 2013 he served as chairman of the China Securities Regulatory Commission.
He is now a member of the 18th CPC Central Committee, deputy secretary of the Shandong provincial committee and Governor of Shandong Province.
Odd: he hasn't worked at Goldman, but for all intents and purposes, it is the same as if he has.
In other words, China gave the whole "prudent deleveraging" thing a try, a try which we mocked last June in "China's Mea Culpa: "It Is Not That There Is No Money, But The Money Has Been Put In The Wrong Place" and failed. Because the inevitable result of said "reform" attempt in this credit-growth fuelled world, was China's economy tumbling, now tracking at sub-7% growth...
... and its housing bubble popping:
... clearly something, which in a country where even the slightest social unrest tremors can lead to instant rebellion, is unacceptable, and which would make the careers of local billionaire politicians quite short.
As a result the time has come to give reform a pause, and return to those policies that never world in the first place, but at least gave the world the illusion that China can grow at 8% or more merely as a result of some $4 trillion in "credit" created each month.
Another way to say it, the Chinese flood gates are about to be opened.
Here is how the WSJ phrases it:
But as the Chinese economy continued to lose momentum this year, the PBOC came under increasing pressure to help spur the economy by providing credit—or ordering banks to do so.
So far, the central bank has been aiming its stimulus narrowly, to avoid a broad-based lending spree such as the one that propped up growth following the 2008 global financial crisis but also saddled the economy with debt and bad loans. Other government agencies, though, are calling for across-the-board cuts in interest rates.
In other words, China's austerity if one wants to call it that, is now over, and the liquidity bonanza is about to explode.
Within the central bank, word of Mr. Zhou's coming retirement has been water-cooler talk for weeks, according to PBOC officials and advisers. They were especially surprised when Mr. Guo unexpectedly and unusually attended a monthly meeting convened by the secretariat of the central bank's monetary-policy committee on Sept. 16, according to the PBOC officials and advisers.
President Xi named Mr. Zhou to a third term in March 2013, despite Mr. Zhou having passed the retirement age of 65 for senior Chinese officials. Over the past few months, Mr. Zhou has continued to press for market reforms, including liberalizing interest rates. The Chinese leadership, meanwhile, has become concerned that reforms now will add another burden on an economy that is struggling to meet the government's target of 7.5% annual growth.
Removing Mr. Zhou "could suggest a subtle shift in the balance of power between reformist and reactionary forces, with the momentum for reforms being eroded by the loss of growth momentum in the economy," said Eswar Prasad, a Cornell University China expert.
One reason to retain Mr. Zhou is fear of the market reaction to his departure, say the party officials. Mr. Zhou is perhaps China's best-known economic official. He represents China at meetings of the International Monetary Fund and Group of 20 and plays tennis with central bankers and senior economic officials. He and Lawrence Summers, U.S. President Barack Obama's then chief economic adviser, once jokingly bet when they played doubles against each other that the winner of the match would set the U.S.-Chinese foreign exchange rate. (Mr. Summers lost and asked for a rematch.)
...there are larger policy issues involved.
Mr. Zhou kept pressure on leaders to stick with reform even if it diminished the growth rate. While the government and party in principle backed the idea of letting bank deposit rates float freely, for instance, Mr. Zhou tried to nail down a date for lifting government controls, a move he has said is critical in forcing banks to compete and allocate credit more efficiently. In March 2014, he said the goal could be accomplished in two years, and on July 10 reiterated that goal.
That was out of tune with top leaders. Two weeks later, the State Council, the government's top decision-making body, said the reform would be carried out in an "orderly" way—usually code words for moving slowly.
Top party leaders are also considering splitting the roles of PBOC governor and party chief after Mr. Zhou retires, the officials said. Currently, Mr. Zhou has both jobs. Leaders considered such a plan in late 2012, with Mr. Zhou remaining as PBOC chief and someone else taking the party job, but they viewed the idea as unworkable because it could be seen as a demotion for Mr. Zhou. In China, party officials generally outrank government officials in an organization.
The bottom line, which incidentally is also true in the US and Europe: "Everybody seems to be interested in talking about reform, but they really fear what they are professing to love," said Zhang Xiaohui, head of the PBOC's monetary-policy department, in a May 2014 meeting, according to a transcript of her remarks viewed by the Journal.
So as expected, China's brief and volatile experiment with if not deleveraging, then injecting credit into the system at a less breakneck pace is over. For what happens next, see the ECB and the BOJ, and soon enough, when global growth crumbles and not even BLS data fudging can mask the slowdown in the US, the Fed's own Untaper as well.
In short: when it comes to global liquidity injections, the world is about to go back to square one.
* * *
As a post-script, and as an explanation why CHina's attempt to succeed in what the West has tried to do for over 6 years and failed, here is, from June of 2013, "China Joins The Broken "Keynesian Multiplier" Club"
A week ago we showed a chart from Charles Gave which does a terrific job at explaining why the modern economic "science", in conjunction with the Fed's negative rate environment, have failed at their ultimate stated mission - to stimulate growth. The reason: the Keynesian multiplier, which has tracked the nominal US GDP 7yr average change with a very high correlation, is now negative. From Gave: "shows that the marginal efficiency of public debt, at least in the US (public spending in emerging markets from a low base usually improves productivity) has been declining structurally since 1981. And it seems that this marginal efficiency has now reached a negative level."
The good news, at least over the past two decades, is that for all the failings of globalization, there were other developing countries and regions around the world, that had the credit capacity to inject debt momentum into their and, in an infinitely fungible world, the global economy. This is why China was so instrumental as a growth counterweight during the great financial crisis following the Lehman failure.
There is, however, a problem: as the chart below shows, China now has a Keynesian multiplier problem of its own. Even as the Chinese politburo and the PBOC have been injecting an ever increasing amount of credit into the private sector - the primary source of Chinese growth - the incremental GDP growth has been trending lower, and lower, and lower...
- The good news: unlike in the US, the multiplier is not yet negative, as there still is some GDP reaction in response to every "credit impulse."
- The bad news: each successive GDP response is weaker and weaker, even as the credit injection has no choice but to be larger and larger.
Which begs the question: is this why the PBOC has been so hesitant to ease once more, even as the inflation in the real estate market largely courtesy of foreign central bank liquidity injections by the Fed and BOJ which wash ashore on the mainland, well-aware such liquidity injections would have to be far greater than any before to achieve the same economic growth results?
And what happens to global inflation rates once China, which will ultimately have to ease to prevent the complete collapse of its banking sector, does proceed with proving that it is precisely the negative Keynesian multiplier that will be the great undoing of the Keynesian school of economics?
Luckily, once the BOJ's reflation experiment fails, and after China repeats the soaring inflation days of 2011 only to tighten all over again, there is still Europe. The only problem with Europe is that as we showed recently, credit creation is already record low and absent the ECB openly monetizing debt to inject reserves and boost stocks, there is little hope.
Finally, if Bernanke is indeed on the way out, which even more dovish ex-Goldmanite will replace Mario Draghi, as the onslaught for the final reflation attempt reaches its climax?