William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."
After months of watching the economic outlook darken, China's central bank finally seems ready to do something about it. Perhaps something big, even.
Since May 10, People's Bank of China officials have telegraphed "more powerful" policies to counter the "unprecedented" risks posed by the coronavirus pandemic. It even dropped its long-standing vow to avoid "flood-like" liquidity injections.
It seems the PBOC has reached its "Mario Draghi moment." The reference here is to the former European Central Bank president's 2012 pledge to do "whatever it takes" to save the euro. The phrase has since become a hallmark of seriousness in the face of financial turmoil, channeled by peers from Tokyo to Washington to Sydney.
Now, as PBOC Governor Yi Gang appears ready to do just that, the question is whether he is too late.
Economic news has been bad but the PBOC's reactions have been slight. PBOC officials cut rates only modestly following news the economy shrank 6.8% between January and March, the first contraction since 1992. On April 20, it reduced its benchmark lending rate by 20 basis points to 3.85%.
As the U.S. Federal Reserve and authorities throughout Asia raced to cut interest rates assertively, Chinese officials mostly opted for lower reserve requirements and targeted lending to fragile companies.
At the very least, the PBOC has now signaled a greater degree of concern about China's trajectory after the whiff of outright deflation in factory prices. In April, producer prices fell 3.1% from a year earlier. That speaks to nose-diving demand at home and abroad, with business likely to dwindle even further.
Factory deflation depresses corporate profits, reduces incentives for investment and expanding businesses and brings China Inc.'s over-indebtedness problems to the fore. China's role as the biggest exporter makes the world's second biggest economy well-positioned to share these deflationary forces with the rest of the globe.
It is good to hear the PBOC is ready to deploy its considerable firepower. What is needed, though, is less talking and more doing. Granted, Yi has quite the balancing act on his hands. Since taking the reins in March 2018, Yi has led efforts to deleverage the financial system. So far, he has favored targeted micro-blasts of liquidity rather than sweeping increases in the national money supply.
Yet in trying to mop up the excesses of the stimulus following the 2008-09 Global Financial Crisis, the PBOC risks making a big policy mistake: failing to realize that COVID-19 fallout is a much bigger threat to China's economy and the legitimacy of President Xi Jinping's Chinese Communist Party.
The problem is that he has many fewer engines of growth to rely on today.
Wall Street's 2008-09 reckoning was a shock to the global system driven by toxic debt. Today's has more moving parts: a pandemic keeping billions at home, not consuming, each country struggling with the balance between lockdown and reopening. That is triggering deep recessions that risk turning good debts bad.
China had far more fiscal space in 2008 to order up huge public works projects to create jobs. It had reasonably stable overseas markets to which it could sell goods. Neither exists today. By mid-2019, China's total debt topped 300% of gross domestic product.
China already has too many unfilled apartment complexes to think about a massive building program as an economic driver. Who needs an even bigger real estate overhang?
The coronavirus shock is hitting the U.S., Europe, Japan and emerging economies everywhere, reducing China's ability to export its way to growth. Simply put, there is not a single growth engine of scale to toss China a lifeline.
Meantime, U.S. President Donald Trump is running a blame-China reelection game. It could mean more tariffs, a currency war on top of a two-year-long trade brawl and new disruptions to the supply chains on which Asia relies.
The sharp drop in China's first-quarter GDP could be as good as it gets for a while. That requires an all-hands-on-deck response that pushes the PBOC out of its comfort zone.
One possibility: give quantitative easing a try. Even during the darkest days of the Lehman shock of 2008-09, Yi's predecessor Zhou Xiaochuan resisted the urge to buy huge blocks of long-dated government securities, Japan-style. Or, Draghi-style, for that matter.
The PBOC should be pumping increased liquidity into small and mid-size companies. With few high-level political connections, China's SME sector has been hit especially hard by fallout from both the trade war and the pandemic. The $254 billion of credit the PBOC has committed to SMEs and exporters is unequal to the task of saving jobs.
Yi's team could empower banks to increase credit loans. Looser credit conditions would make it easier for the nonstate sector to issue bonds to fund operations during coronavirus headwinds. The PBOC could be more ambitious about letting small businesses delay repayment of principal and interest. That would reduce default risks, giving investors greater incentive to buy their debt.
Central banking is, at its essence, a confidence game. In recent months, the PBOC has done more watching and waiting than convincing the globe it means business boosting a $14 trillion economy. Now, as it promises to wow markets with a big display of monetary support, officials in Beijing must be very careful not to disappoint. Whatever it takes, right?