The People’s Bank of China (PBOC) building in Beijing, China.
Andrea Verdelli/Bloomberg
If you think Jerome Powell and Kazuo Ueda are having a rough 2024, consider the plight of their central banking counterpart in Beijing.
Governor Pan Gongsheng may be holding the reins at the People’s Bank of China as deflationary pressures upend Asia’s biggest economy. But any big decisions are made a few rungs above his pay grade.
Sure, debates abound about how truly independent central banks are. In Washington, though, Federal Reserve Chairman Powell is widely seen holding the controls. The same goes — for the most part — for Bank of Japan Governor Ueda in Tokyo.
In Beijing, Pan faces a daunting array of challenges whipsawing his attention in different, sometimes divergent, directions. Take the deflationary pressures putting China in global headlines for all the wrong reasons.
Admittedly, China’s weak-price trend is, as of now, reasonably mild relative to Japan’s in the late 1990s. In September, consumer prices rose 0.4% year on year. Under the surface, though, producer prices dropped 2.8% after falling 1.8% in August.
It seems only a matter of time that sliding factory gate costs will filter through to the broader economy and Chinese supply chains. The lesson from Tokyo’s experience over the last 25 years is for monetary authorities to act quickly, assertively and transparently to stabilize prices.
Pan might be doing exactly that if not for Xi and the Communist Party bigwigs looking over his shoulder. The giant property crisis dragging on Chinese growth, after all, echoes the bad-loan debacle that caused Japan’s lost decades. Bold easing would seem just the thing to jolt confidence.
But the Beijing political establishment has other ideas — and three big reasons to favor monetary restraint by the PBOC.
One, a weaker yuan might increase default risks, particularly among property developers with sizable offshore debts. The last thing Xi’s inner circle wants is to see #ChinaEvergrande trending again.
Two, it might make China an even bigger blip on Washington’s radar screen as a uniquely contentious U.S. election unfolds. The one thing on which Donald Trump’s Republicans and Democrats loyal to Kamala Harris agree is on being tough on Beijing. Hints that China is manipulating the yuan lower could trigger bipartisan scorn in Washington.
Three, internationalizing the yuan is arguably Xi’s biggest economic reform success since 2012. In 2016, China won a place for the yuan in the International Monetary Fund’s “special drawing rights” basket joining the dollar, yen, euro and pound.
Since then, the currency’s use in trade and finance has soared. Excessive easing now might dent trust in the yuan, slowing its progression to reserve-currency status.
So, lots of moving parts from Pan to get his hands around. A big one of China’s wobbly stock market, which between September 2024 and a 2021 peak saw $6.5 trillion of market value disappear.
On top of property sector troubles, the PBOC is grappling with the fallout from near-record youth unemployment and an economic model that encourages households to save more and spend less. Addressing this latter challenge requires Beijing creating bigger and more dynamic social safety nets.
Then there’s China’s troubling demographic trajectory. As Japan taught us, an aging and shrinking population tends to be inherently deflationary. That’s because people in their 70s and 80s don’t spend the way folks in their 20s, 30s or 40s do.
The external sector is its own minefield for PBOC officials. Naturally, a Trump 2.0 presidency would see trade wars the likes of which the globe has arguably never seen before. Trump is telegraphing 60% tariffs on all mainland goods, and odds are that’s just the beginning.
It’s not just Trump, of course. As we’ve seen with President Joe Biden’s administration, surgically targeted curbs are no picnic for China. Biden’s success in limiting China’s access to vital technology — and curbs on semiconductors to electric vehicles — is arguably causing bigger headaches for Xi than Trump’s 2017-2021 tariffs. A Harris White House would almost certainly continue to make life harder for China Inc.
Europe also is tightening the screws. EU levies on China-made EVs even has Beijing targeting European brandy imports in an escalating tit-for-tat brawl with Brussels.
Clearly, these crosscurrents are beyond the PBOC’s control. But the economic feedback efforts will make Pan’s job harder and harder. Not having the autonomy needed to act nimbly to the economy’s zigs and zags adds an extra layer of complexity to Pan’s job that neither Powell nor Ueda confront.
But while Xi gets all the headlines around the globe, it’s Pan’s lesser-known policymaking team that will play an outsized role in whether China exports economic growth or deflation in the year ahead. And whether China’s $6.5 trillion stock rout is officially over. Odds are, few peers would want to be in Pan’s shoes as 2025 approaches.