October 20, 2017 / 4:36 AM / a year ago

Breakingviews - PBOC’s Zhou seeks lasting sway with debt warning

China's central bank governor Zhou Xiaochuan speaks during a session on the second day of the 19th National Congress of the Communist Party of China at the Great Hall of the People in Beijing, October 19, 2017. REUTERS/Thomas Peter - RC12D9038530

WASHINGTON (Reuters Breakingviews) - China’s taciturn central bank governor suddenly has lots to say. Zhou Xiaochuan, head of the People’s Bank of China, grabbed headlines by warning on Thursday of a possible “Minsky moment.” His reference to a potential financial and economic crash follows other urgent calls for reform in recent days. The comments seem aimed at burnishing his legacy, as well as trying to ensure a like-minded successor fills his shoes.

Zhou is quiet, even by his profession’s standards, and usually grants interviews only when he needs to calm markets. Yet on Oct. 9, Caijin magazine published a rare interview in which the central banker made a strikingly direct call for a more open capital account. At a panel on Sunday in Washington, D.C., he stressed the need to tackle the country’s $18 trillion in corporate debt. And on Thursday, he talked at length about leverage and financial risks on the sidelines of the Communist Party Congress.

The 69-year-old governor is expected to step down soon and would no doubt like to burnish his legacy as a reformer who has worked to liberalize China’s markets and open them up to foreign investors. His most tangible accomplishment came last year when the International Monetary Fund included the yuan in its basket of reserve currencies, the Special Drawing Right.

His warning might also be an effort to buy some reputational insurance – a case of “I told you so” if a mounting debt burden causes the economy to shudder. In context, his recent speeches are even-handed. But Zhou has been at this game for 15 years. He must know that merely using the term Minsky moment, or saying the country can never have an open economy with a tightly controlled currency, will resound all the more during the most sensitive time of China’s political calendar.

Top officials are in Beijing for the Communist Party Congress, a once-in-five-years gathering where they will likely discuss Zhou’s successor as well as the remit and personnel of bureaucracies overseeing the financial system. The governor’s remarks all but ensure that the case for reform will be top of mind during these closed-door discussions, and might even tip the balance toward someone in his mold succeeding him as governor. If there’s a time for the departing central banker to speak up, this is surely it.


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