Is 2018 China’s big change year?
China’s Zhou Xiaochuan sure knows how to make an exit.
For months now, investors and corporate chieftains have been biting their nails about the retirement of Beijing’s central-bank governor. Zhou, who just turned 70, appears to have engineered a path for Guo Shuqing, a reform-minded, former People’s Bank of China (PBOC) deputy, to replace him. That’s comforting news, allaying fears President Xi Jinping might install a yes-man in the pivotal job. Tapping Guo is a clear sign Xi means to accelerate financial upgrades.
That’s a short-term negative for Asia, but a huge positive in the medium-to-long term. Any serious drive to recalibrate growth engines from excessive credit and investment to services will slow gross domestic product—probably to well below 6%. A positive because China getting a handle on duelling bubbles in credit, debt, property and pollution will stabilize Asia’s biggest economy, avoiding a Japan-like crash.
Caveats abound, of course. Anyone who thinks the process will be smooth and orderly is dreaming. China’s $38 trillion banking systems, with its M.C. Escher world of shadow banks, off-balance-sheet vehicles and state-owned enterprises, is the quintessential financial riddle. The closer you look, the more bizarre things seem. A key problem is that all too many Communist Party bigwigs in Xi’s orbit are getting fantastically rich off Beijing’s tangled web of wealth and influence. Xi will have to be brave in internationalizing China Inc.
Yet, Xi selecting Guo to run the PBOC would be good news as these things go.
Currently, Guo is head of the China Banking Regulatory Commission (CBRC), which has been terrorizing the banking system (in a good way), a campaign that dovetails with efforts by Zhou and Xi to clean up the banking system, curb financial excesses and make Chinese growth less about unproductive borrowing and more about innovation and organic demand.
I list Zhou before Xi here because he’s the real driving force behind the biggest Chinese reforms since 2002. De-pegging the yuan from the dollar in 2006 bore his fingerprints. So did moves since then to liberalize the capital account, scrap deposit rate caps and get the International Monetary Fund (IMF) to include the yuan in its top-five currency list. Zhou also was instrumental to China navigating around the worst of 2008 Lehman Brothers crisis.
In recent years, though, Beijing shifted from retooling to stimulus—in a big way, adding tens of trillions of dollars in new credit. In November, for example, China continued to hit fresh credit-expansion records—$170 billion that month —despite assertive efforts to clamp down on financial excesses. At the same time, even the good news can seem bad. Case in point: the amount of fresh credit needed to gin up $1 of output was about 28 cents last year, compared with 30 cents in 2016. Still, it’s high by developing-economy standards.
Guo’s eclectic resume could make him uniquely qualified to impose some lending sobriety. Along with serving as vice PBOC governor, Guo has been governor of Shandong province, chairman of China Construction Bank, head securities regular and directed the state agency that oversees Beijing’s $3 trillion of currency reserves. At the CBRC, Guo has gone after industry malpractice, rejiggered lending practices and made cross-holdings of financial products less opaque.
“If Guo is appointed, it will be a ringing endorsement by Xi of his energetic approach to tackling reform in the financial sector, and Guo will lead that position from the PBOC,” says Evan Medeiros, managing director, Asia, at Eurasia Group.
Guo is also proving to be a bit of a hunter—of so-called gray rhinos. The reference here is to a phrase popularized by American author Michele Wucker: “highly probable, high impact yet neglected threat: kin to both the elephant in the room and the improbable and unforeseeable black swan”.
None loom larger in Beijing’s cross hairs than globally-acquisitive giants such as Anbang Insurance Group, Dalian Wanda Group, Fosun Group, HNA Group and Zhejiang Luosen Neili. With their debt-fuelled transactions, they’re becoming too big and too indebted to fail. Guo has been at the centre protecting China from these and other “hidden dangers” Beijing must address to thrive.
It’s an underappreciated threat to Chinese stability. Two years ago, hardly a week passed without Anbang, Dalian Wanda or HNA entering high-profile merger talks overseas—vanity purchases to increase global footprints. Now, they’re all scrambling to shed assets to cover debts. HNA alone is shopping around about $16 billion of asset sales in the next few months.
China faces daunting challenges in 2018, and numerous things could go awry, including US President Donald Trump waging a trade or currency war. Yet, it’s heartening to see Xi leaning toward a PBOC successor with an intimate understanding of the mechanics behind China’s credit and debt excesses. More importantly, a man with the gumption to curb them once and for all. Guo running the PBOC would be reason for optimism, a sign Xi is more than just talk.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek
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