Zhou Xiaochuan, right, head of China's central bank, emerged on the weekend with a detailed assessment of the current situation and the country’s capacity to weather any financial storms.JASON LEE/Reuters
While most central bankers have been devoting considerable effort to publicly explaining their various moves in these troubled times, one powerful monetary policy figure has been conspicuous by his silence.
That would be Zhou Xiaochuan, the 68-year-old economic reformer who has been at the helm of the People's Bank of China for the past 14 years.
Amid troubling economic data, intense turbulence in financial markets, deepening concerns about the shaky Chinese banking system and frontal assaults on the currency by influential speculators, China's version of the Delphic Alan Greenspan has let his deputies play defence for the past six months.
But, just as observers were beginning to wonder if his retirement had occurred without notice, Mr. Zhou emerged on the weekend with a detailed assessment of the current situation and China's capacity to weather any financial storms.
His comments, in a wide-ranging interview with Caixin, a weekly business magazine, that was posted in English on the bank's website, were plainly designed to defuse growing market worries about China's ability to engineer a soft landing, stabilize the exchange rate and keep its financial system from collapsing under a mountain of bad debt.
Just as important, Mr. Zhou acknowledged the risks of Chinese moves adversely affecting global markets, which never occurred when the country had a less consequential economy and more closed financial system.
"We will promote the yuan exchange rate regime reform prudently, choose appropriate opportunities and windows, and minimize negative spillovers," he said.
His positive appraisal, coupled with a stronger fixing for the currency, drove up the value of the yuan against the U.S. dollar and provided a market boost just as the Lunar New Year holiday and the week-long market closing were ending.
The interview appeared only days after Dallas hedge-fund manager Kyle Bass (famous for his lucrative bet on the collapse of the U.S. subprime mortgage market) warned that Chinese banks face loan losses that could be more than 400 per cent higher than those that destroyed a large chunk of the overleveraged U.S. banking system in 2008.
He said in a 12-page letter to investors that, among its other woes, China's banking system is "a ticking time bomb" of bad debt. And when it blows up, the government will need about $10-trillion (U.S.) to fix it – about five times more than its current reserves. That leaves massive currency depreciation as the only solution – a view disputed by some prominent China experts.
"Once China realizes that it must save its banks … it will do so," Mr. Bass said. "The Chinese government has the capacity and the willingness to do what it needs to do to prevent a banking system collapse. China will save its banks, and the [yuan] will be the valve for normalization."
Backing that view, Mr. Bass has amassed a sizable short position, involving a majority of his firm's capital, in both the yuan and Hong Kong dollar. He's in good company on the short-China train.
Fellow passenger George Soros argues that China faces a "major adjustment problem" that reminds him of the 2008 crisis. And then there is Jim Chanos, another famed short-seller, who declared as far back as 2010 that the country was on "a treadmill to hell."
All have drawn the ire of Chinese officials and now a lengthy rebuttal by the person whose hands are on the monetary levers.
"Not letting speculative forces dominate market sentiment doesn't mean we will engage in a head-on fight," Mr. Zhou said. "We also need to consider effective use of ammunition to minimize costs. Further reforming the exchange rate regime itself will give us more flexibility in responding to market speculation."
He then summed up the difficulty facing the entire monetary policy fraternity.
"The central bank is neither God nor magician that could just wipe … uncertainties out. Therefore, sometimes the central bank has to say: 'Excuse us, but we have to wait for new data inputs.'"