When the Group of 20 leaders meet this weekend in Australia, they'll reiterate their determination to boost gross domestic product 2 percent over five years. To reach that target, they're going to have to rely on help from one man in particular: China's Zhou Xiaochuan.
Global markets long ago grew accustomed to what was called the "Greenspan put," referring to former Federal Reserve Chairman Alan Greenspan's propensity (and that of his successor Ben S. Bernanke) to pump up growth at the slightest sign of trouble. That gave rise to the Kuroda put in Japan and the Draghi put in Europe, as Haruhiko Kuroda and Mario Draghi similarly opened monetary taps wide to stave off risks ranging from deflation to volatility in markets.
Now that the Fed is finally ending its huge quantitative easing experiment, who will take up the responsibility of keeping global growth going? More than officials from Washington to Brussels to Tokyo might like to admit, the answer is probably Zhou, China's central bank governor.
Zhou has been a crucial player for many years, of course. That's only natural considering China is the fastest-growing major economy, the biggest holder of both U.S. Treasuries and currency reserves in general, and home to some of the world's most coveted markets and companies.
China now faces its most uncertain economic climate in decades, though, and the normal remedies have lost potency. In the months after the implosion of Lehman Brothers six years ago, China rolled out a major fiscal stimulus plan. The initial $652 billion jolt was followed by more growth inducements than even Beijing could count. China's banks rushed to support state-owned enterprises, and local governments borrowed aggressively to build ever more six-lane highways, dams, airports and ghost towns.
Between the end of 2010 and June 2013 alone, local-government borrowings jumped 67 percent, almost 40 percent of that through opaque off-budget financing vehicles. Not surprisingly, economists and mainstream publications quickly began characterizing China as the Lehman economy -- one powered by murky funding sources and questionable off-balance-sheet investments, and led by officials who treat data on the true size of national debt burden like a state secret.
Many have expressed surprise at how patient those same Chinese leaders have been in recent weeks, amid a barrage of truly ugly data releases: the weakest growth in industrial production since the 2008 global crisis, a second straight monthly contraction in exports, and a 40 percent decline in the broadest measure of new credit. Despite the pain, President Xi Jinping and Premier Li Keqiang are standing on the sidelines rather than pumping new stimulus into the economy.
Instead, they're smartly deferring to the "Zhou put." This week, the People's Bank of China injected $81 billion into the country's biggest banks. By attaching a three-month term to the action, Zhou is supporting the financial system in a methodical, calm way without adding to the nation's daunting debt load. It may signal that Xi and Li are ready to do what they pledged a year ago -- tolerate growth slower than this year's 7.5 percent GDP target. By handing the controls to Zhou, they're taking the first step toward ending China's addiction to excessive investment.
Royal Bank of Scotland economist Louis Kuijs calls Zhou's strategy "quantitative easing with Chinese characteristics." And that's a good thing. Zhou, one of the top architects of China's reforms over the last decade, has often seemed sidelined over the last year as the government continued to borrow with abandon. At least now Xi and Li seem to accept that China's debt-fueled growth has veered in the direction of diminishing returns. Better to let the central bank play a bigger role in managing China's unfolding slowdown, adding thrusts of growth inducements rather than risk credit downgrades and a Japan-like debt crash.
This means, however, that Zhou's every word, action and deed is going to be analyzed and scrutinized the way Bernanke's were in the years after the Lehman crash. At this weekend's G-20 confab, his successor Janet Yellen will continue to hold much of the spotlight as she details her next monetary-tapering move. The more the Fed retreats, though, the more the responsibility will fall on Zhou to prevent a crash in China that could cripple the world economy. Expect his $81 billion injection to be the first of many moves to offset the loss of Fed liquidity. All should be watched carefully.
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