Bureaucratic Turf War in China Threatens Yuan

The PBoC is one of the best managed institutions in China. Now it is being targeted.

Reuters: China’s PBOC showdown will force Xi to pick sides

Officials, per anonymous sources quoted in the Wall Street Journal, are bothered by alleged moves toward “independence” by the central bank. The PBOC has grown more powerful, but it has never been free to set rates the way the U.S. Federal Reserve Board or the Bank of England are. Even so, the presence of disciplinary watchdogs in a bastion of pro-market reformists looks alarming for their supporters.

Technocrats Guo Shuqing and Yi Gang, party secretary and governor of the PBOC respectively, were given wide latitude to reduce systemic financial risks as duff loans reached an estimated $1.5 trillion and household debt soared. They have played hard ball, holding interest rates relatively high throughout the pandemic, locking highly indebted companies out of domestic credit markets and suppressing shadow banking.

This made many investors and bureaucrats understandably cranky. Chinese equity indexes are some of the world’s worst performers this year. Local governments hate what austerity does to their balance sheets. The Ministry of Finance is unhappy because it foists the burden of preserving employment onto the fiscal side. But Xi’s support of deleveraging, in particular for real estate, appeared ironclad.

However, the latest suppression of the property sector, which drives up to a third of China’s economic activity, has destabilised markets and swollen the ranks of PBOC’s enemies. At the same time Beijing’s confidence that it has weathered the worst of the pandemic is wearing thin; top officials may have pressured the central bank to cut banks’ reserve requirement ratios on Monday. They might order the PBOC to drop benchmark rates next, which would take the heat off a long-running yuan rally, or ease other credit curbs.

Most of the "China is better than the USA" and "yuan will replace dollar" arguments rest on the PBoC. That is, foreigners don't know the institutional breakdown inside of China, they don't know where the political power resides. The PBoC and SAFE and Ministry of Finance have fought turf battles for years. See for instance this post in 2018, made up of clips from news articles: Local Debt Risk Driving Turf War as PBoC and MoF Toss Hot Potato. An earlier post was SAFE and PBOC Battle For Control.

If the PBoC loses stature in this latest turf war, I would interpret that as bearish for the yuan long-term. To use an analogy closer to home, as much as people (myself included) hate the Federal Reserve with good reason, the truth is someone like Powell would slam the brakes if Congress went hog wild with spending. Which would probably lead to Powell being replaced by someone more pliable, right? That's what may be unfolding in China. I'm not so interested in the real impacts of this near-term, but more with the narrative impact. Maybe some of the people who think China's planners have some genius strategy will realize they're running a giant credit bubble like everyone else. Once the bloom comes off that rose, some fractionof those people will realize loading up on Chinese debt because some jackasses at MSCI put it into an index is not a winning move. Imagine owning Chinese bonds and you can't take the currency out, how do you hedge against Chinese currency devaluation? It's going to be the world's biggest roach motel for global capital one day. For now, that hotel is the Nasdaq.