China tosses central bank independence on the fire as it tries to rekindle its economic spark

(Originaly published Dec. 27 in “What in the World“) With Beijing shuddering under the coldest temperatures since 1951, China has decided to throw central bank independence on the fire in a desperate bid to thaw out its economy.

Beijing has placed the People’s Bank of China under the newly created, Communist Party-controlled Central Financial Commission and handed the job of regulating finance outside securities to the National Administration of Financial Regulation, or NAFR. The NAFR was created in March to replace the China Banking and Insurance Regulatory Commission. The NAFR will reportedly take over the PBoC’s more than 1,600 county-level branches.

That essentially ends the central bank’s independence, a vital element of economic stability. Demoting the PBoC signals that interest rates and monetary policy will from now on heel more closely to the policy demands of the Party. Communist or not, governments that control rates tend to keep them as low as possible to stimulate growth.

And China needs to stimulate growth. The economy is moribund, threatening to detonate a long-expanding credit bubble in the property market. That has pushed China’s middle class consumers into a bunker mindset about spending. Some are checking out of China’s urban consumer culture altogether and fleeing for enclaves of counterculture like Dali.

But unless faced with little choice, central banks tend to dislike printing cheap money to inflate asset values and thus keep debt bubbles inflated (like the U.S. Federal Reserve did when, during the global financial crisis, it began printing money through quantitative easing), instead favoring fiscal stimulus and painful debt restructuring to avoid moral hazard. But that means forcing losses onto the citizenry, banks, developers and onto rich and powerful people. And that is never a recipe for political popularity.

Reorganizing the way China’s economy is planned this way also further separates it from the structure commonly used outside China. This means more of the key measures of China’s economy will be more difficult for outsiders to understand or trust. And it will be more difficult to make sense of how policies in Beijing translate into economic reality. Indeed, it will become even more difficult for those outside China’s policy-making circles to know what economic reality even is. And that is just the way the Party likes it. Reality is what the Party says it is. Who are you going to believe? The Party or your own eyes?

Beijing is reportedly ordering the country’s exporters to boost sales targets in 2024 to support the economy. That has heightened concerns that Beijing will resort to revving up its old, coal-burning, smog-belching heavy industries to generate quick profits and growth. China has recently begun approving construction of new coal-fired power plants, raising concerns that it is backtracking on its goal of net-zero carbon emissions by 2060.

Beijing has said more coal-fired power plants are part of its transition and represent only a small portion of the overall expansion in energy needed to keep up with burgeoning power demand. But China’s air pollution began to rise this year for the first time in a decade, according to a study released last week by the Helsinki-based Centre for Research on Energy and Clean Air.