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Opinion

What the Fed can learn from the People's Bank of China

Beijing is returning to monetary sobriety faster than Washington

| U.S.
The headquarters of the People's Bank Of China, pictured on May 4: unlike the Fed, the PBOC is anything but independent.   © FeatureChina/AP

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

As Federal Reserve officials in Washington search for a way out of years of desperate rescue-stimulus moves, they might consider looking to a most unexpected place: Beijing.

Suffice it to say, Fed Chairman Jerome Powell has a serious punch bowl dilemma on his hands. The reference here is the famous metaphor served up by Fed chief William McChesney Martin in the 1950s. A central banker's job, Martin said, is to "take away the punch bowl just as the party gets going."

Early in Powell's tenure, which began in February 2018, he pursued the central-banking equivalent of the Hippocratic oath. He did no harm, sticking with predecessor Janet Yellen's moves to normalize 2008-crisis-era interest rates. Then came COVID-19, which saw the Fed slash rates back to zero. And give the Bank of Japan competition in the quantitative easing department.

Yet as U.S. growth returns, so are fears of inflation and overheating. It is now too late for Powell's team to signal last call to avoid bad behavior and hangovers. It is already here, if sky-high stock valuations are any guide. Powell worries that cutting investors and businesses off too abruptly would crash markets everywhere.

This bubble in anxiety preoccupying Washington is quite a contrast to the relative calm at People's Bank of China headquarters in Beijing.

Unlike the Fed, the PBOC is anything but independent. It is, of course, an arm of President Xi Jinping's Communist Party. In recent years, though, the PBOC has acted far more autonomously than the Fed under Powell.

Here, another metaphor leaps to mind: the circular design of PBOC headquarters. As Powell's staff keeps liquidity taps on full blast, his Chinese counterpart, Gov. Yi Gang, has been quietly, but steadily, yanking away the punch bowl to deleverage Asia's biggest economy. This divergence between Gov. Yi Gang's policies and Powell's dramatize how the tactics of both operations are indeed going full circle.

Fed Chairman Jerome Powell has a serious punch bowl dilemma on his hands.   © AP

It is complicated, of course. Powell is a creature of a Donald Trump era that Washington is desperate to move beyond. The former president shocked the finance world by naming a non-economist to run the Fed, something that had not happened in four decades.

Powell's early tightening moves enraged Trump, who repeatedly assailed his Fed leader on Twitter. For a time, Trump even considered firing Powell for insufficient loyalty. Granted, the idea of central bank independence has gotten rather muddy since the 2008 global financial crisis. But Trump's public attacks on the Fed's independence shocked investors.

Only Powell knows how much fears of being fired informed his turbocharged easing moves -- and ginormous asset purchases in 2020. The extent to which U.S. stocks have skyrocketed amid the pandemic demonstrates how the Powell Fed acted more like a government ATM than a sober institution. And why the Fed may be trapped near-zero interest rates, with more government bonds and stocks via exchange-traded funds than it knows how to manage.

Now, as inflation perks up, talk of Fed tapering is the rage. Chalk it up to terrible memories from late 2013, the last time an about-face in Fed policies shook world markets. There is less panic over PBOC tapering because, well, it has already been happening in stealth.

The irony is that both the PBOC and the BOJ may ultimately outpace the Fed in moving away from free money.

Governor Yi's team is doing it in targeted ways. The PBOC is tweaking overnight repo rate dynamics. It is using "macroprudential" tools to cool asset markets. It is capping credit to overleveraged sectors like housing and shadow banking entities. Meantime, it is making liquidity more accessible for small businesses, and spearheading moves to shift debt burdens from local municipalities to central-government entities.

The PBOC has been at the center of Beijing's surprising tolerance of a stronger yuan. This, in many ways, stems from the policies of Yi's predecessor Zhou Xiaochuan, who ran the PBOC from 2002 to 2018. Yi stayed the course in ways that have Goldman Sachs, JPMorgan, BlackRock and peers expanding staff in Shanghai.

Then there is the future of money. In early 2022, around the time Beijing hosts the Winter Olympics, the PBOC plans to be the first major central bank to make its own digital currency widely available to consumers. We can debate the logic of Bitcoin, Dogecoin and other private crypto assets, but central bank digital cash is about to start replacing inefficient notes and coins -- and the PBOC will set the tone long before the Fed wakes up.

The BOJ is its own tapering wild-card. In May, Gov. Haruhiko Kuroda's team had its first ETF-purchase-free month since 2013. That was the year Kuroda took the helm and supersized efforts to reflate the economy by cornering the bond and stock markets.

Time will tell if this is the beginning of a Kuroda campaign to declare last call. It does seem time. After eight-plus years of historic easing moves, inflation continues to flatline. A wholesale reassessment of BOJ tactics could go a long way toward increasing business and household confidence.

The point is not to idolize the PBOC. Its opacity and overlapping financial regulations are fair game for criticism. Its anti-money-laundering policies need serious tightening. And Xi's government is always looking over its shoulder.

But because the PBOC kept its head, while the Powell Fed lost track of its many punch bowls, China is returning to monetary sobriety faster than Washington. How is that for monetary irony?

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