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Jun 23, 2013
Police officers outside the People’s Bank of China, the country’s central bank, in Beijing. The bank eased up on a cash squeeze Friday, a day after interest and interbank lending rates soared.
The turbulence that struck China’s banks this week is the latest episode in a political drama likely to play out in coming months: President Xi versus President Xi.
The country’s new leader, Xi Jinping, has ignited expectations of bold economic liberalization, but he has also cast himself as a resolute defender of Communist Party control, leaving even insiders uncertain about how far he will push changes that could strain the webs of state patronage and unsettle the stability that he and many other officials also prize.
The changes proposed by some Chinese officials include rolling back certain state controls on prices of energy and natural resources, encouraging private business in industries long dominated by state conglomerates and bringing more market competition into the financial sector.
But such ambitions could falter in the face of opposition from other officials and state-owned companies, as well as the concerns of party leaders about social instability and slowing growth. The turmoil of bank-to-bank loans is but one example of the kind of economic jitters and pitfalls that Mr. Xi and his colleagues could confront as they grapple with these policy choices, analysts said.
“So much risk has already been accumulated, but they need to avoid panic while pushing forward real reforms,” said Tao Ran, an economics professor and director of the China Center for Public Economics and Governance at Renmin University in Beijing. “It’s politically very difficult.”
The interest rates that banks charge to lend to each other shot up Thursday and lending between banks nearly seized up after the People’s Bank of China uncharacteristically failed to intervene to relieve a cash squeeze. The move seemed to be part of the government’s effort to force state banks to cut lending to inefficient or risk-laden programs favored by local officials and politically connected investors, many of them state-owned companies.
On Friday, the People’s Bank of China appeared to retreat a bit from its hard-line stance, and financial industry executives said the central bank was releasing more money for lenders, calming investors whose worries about China’s growth had rippled across stock markets. Bank-to-bank rates climbed down from Thursday’s record highs, but the situation remained volatile.
“I thought that was a show of policy makers’ determination,” Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong, said of the cash crunch. “They want to impose some near-term pain for long-term benefits. What they are doing is preparing steps for liberalization and, hopefully, for better market discipline.”
In China, the Communist Party’s power rests on a marriage of political and economic control, but Prime Minister Li Keqiang and other officials have said market liberalization is needed to foster new sources of growth.
Yet those changes could require painful, even risky, surgery on the party’s limbs of power: state-owned banks, local governments, and companies and investment vehicles controlled by the government. And that is the conundrum facing China’s leaders: they want to maintain the growth needed to satisfy an increasingly prosperous and vociferous society, yet worry that the proposed changes could erode the political reach and stability they see as underpinning one-party rule.
“Economic reform, I mean real reform, undoubtedly now involves questions about the political system, because excessive state power is a key issue,” said Deng Yuwen, who was dismissed this year as an editor at a party newspaper, The Study Times, after bluntly criticizing state policies.
Mr. Xi, as party leader, must come up with at least part of his answer to these questions by autumn, when the party’s Central Committee gathers. With slightly more than 200 senior officials as full, voting members, the committee meets in seclusion at least once a year to approve policy priorities. This meeting, or plenum, is the third for this cohort of the committee — by custom, third plenums set the direction for economic policy — and Mr. Xi and other officials have indicated that they want this gathering to unveil major changes.