When Alan Greenspan stepped down as Federal Reserve chairman in 2006 he was described as one of the greatest economic strategists of his generation. Barely two years later – and in the wake of the worst banking crisis since 1929 – he was being pilloried for the quality of financial oversight during his 19-year tenure. “My question is simple. Were you wrong?” he was asked at a congressional hearing in 2008. (“Partially,” the long-serving central banker replied.)
His ordeal might have resonated with Zhou Xiaochuan, who has served as the governor of the People’s Bank of China for 15 years. The 69 year-old is widely expected to retire by the time legislators gather for their annual meeting in March next year. But before his departure, Zhou has been delivering some blunt warnings on the health of the world’s second biggest economy.
“If there’s excessive optimism in the boom period, it will lead to an accumulation of conflicts [in the economy], which may end up with a so-called Minsky moment,” Zhou predicted during a panel discussion of financial regulators in October, referring to the potential for a sudden collapse in asset prices sparked by a debt or currency crisis.
In a lengthy article published on the PBoC’s website last month, Zhou also warned about “latent risks”, including some that are “hidden, complex, sudden, contagious and hazardous”. The outgoing PBoC boss also said that regulators had to be vigilant about collusion between “financial crocodiles” and “moles” inside the regulatory regime.
Quite a combination, but remarks like these are rare for Zhou who, similar to Greenspan, has a reputation for vaguer, less direct discourse.
“The latest warnings from Zhou have been an abrupt departure from his usually moderate style, and far sterner than most could expect,” a commentator wrote in Takungpao, a pro-Beijing newspaper in Hong Kong. “The changes [in Zhou’s stance] might point to a swing in policy headwinds.”
In another signal of a new departure in the regulatory world, the Financial Stability and Development Committee (FSDC) has now been set up under the State Council. The long-touted “super regulator” held its first meeting last month, aiming to improve coordination between the PBoC and the three regulatory bodies that oversee banking (the CBRC), securities (the CSRC) and insurance (the CIRC).
According to Xinhua, the new body will supervise China’s monetary policies and financial regulations, formulate a new approach on systemic risk management, and even dish out directives to local governments.
And two weeks after the FSDC’s first meeting, there was a new set of guidelines from the PBoC to clean up the asset management industry, especially the issuance of wealth management products (WMPs) by the banks. Many of these have ended up off balance sheet, financing dubious local government projects, and driving up the risks of bad debt in the financial system.
The PBoC’s new approach, which was announced jointly with the CSRC, CBRC and CIRC, heralds a far-reaching clampdown on WMPs and trust products. Most notably, financial institutions are required to limit their leverage when issuing the products – a move likely to hit the smaller banks, which are more reliant on selling them. Banks will also be punished if they dip into their own capital to cover investor losses and they are forbidden from insinuating that the products have an implicit ‘government guarantee’ (Reuters says the goal is to change a “deeply-ingrained culture that sees investors dump cash into risky, high-yielding assets [like WMPs] and expect state protection”).
Will the plan have an impact? As ever, the proof is in the pudding. And as things stand the measures won’t be implemented until June. By that time Zhou Xiaochuan will likely be retired and hoping his legacy proves more robust than Alan Greenspan’s.
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