Somewhere deep in the diaries of Zhou Xiaochuan (China’s chief monetary officer) resides profound admonitions to strong to admit, namely that economic laws are real and cannot be surmounted for long. Outspoken, even blunt toward the end of his tenure, he recently wrote on China’s own central bank website that “China had accumulated hidden, complex, sudden, contagious risks.” As American China-watchers have known for decades, the nature of China’s political regime is the source of its financial, monetary vulnerabilities.
Another way of describing China’s source of risk is the dominant share government has in the allocation of capital. Assets held by poorly regulated shadow lending has dropped but it remains a deep source of anxiety for Xi Jinping.
Nevertheless, with Xiaochuan governorship of the Central Bank ending, he rhetoric is deeply countercyclical, even pessimistic. Perhaps he knows the limits China’s own political class has for reform.
Zhou continues to admonish Beijing’s leadership to open China’s capital account, if only to leverage America’s own financial system while pushing Chinese financial markets toward norms that openly favor symmetry with global market forces. China’s currency isn’t convertible into anything and its market regime is closed. Permitting freer trade throughout Asia in Beijing’s currency will tamper down the very militancy demonstrated in its southern littoral.
Here’s a difficult truth to handle, but one that remains essential IF China is to open up its monetary, financial markets toward reform: Beijing’s plutocrats ultimately dictate monetary policy, and they rarely if ever think outside of Beijing’s interests.
Get ready for a long, difficult, opaque road toward reform.