Eldon, Missouri – (StockNewsDesk) – 09/25/2014 — With an economy that continues to underperform relative to expectations, China’s leadership is considering removing People’s Bank of China’s head Zhou Xiaochuan. The country has continued to struggle to find the right balance between growth and financial stability.
Zhou’s Hawkish Stance
Many in the government are more concerned about short-term struggles, which involve property prices rapidly deflating, bank loans decreasing, and consumer spending under pressure. Zhou’s continuous focus on inflation and financial stability has come under question, especially as economic data continues to show a struggling economy.
Zhou was ascending when these issues were at the forefront with the most pressing concern being an overheating economy. However, he has shown an inability to pivot with changing dynamics within the Chinese economy. As growth rates have slipped from above 10% to now below 7%, the doves, calling for his ouster, have gained credence. The final straw seems to be downgrades of Chinese growth this year and next year, as well as manufacturing data and power consumption data reflecting a decelerating economy.
Surging Stock Market
Stock markets are famously forward-looking, anticipating future events, rather than news or economic data releases, which are backwards looking. Thus, it is important to note Shanghai Stock Exchange has been rallying on rumors of Zhou’s dismissal. While Zhou’s financial reforms and tampering down on inflation are good for markets in the long run, in the short-term, they cause pain.
Furthermore, a new selection made by President Xi Jinping, will likely lean dovish, so the markets are expecting greater stimulus efforts. Most of Zhou’s stimuli were on a small-scale and much targeted. A new premier may look to do something more aggressive and open ended with a specific growth target, as other officials at the PBOC have argued.
The stock market’s price action and relative strength compared with other global indices, reflects that Chinese market participants would be receptive to such a change in leadership. Under Zhou’s tenure, the stock market has been in a depression, as it is basically flat the last five years. However, in the last two months, as rumors began to circulate regarding Zhou’s job security, stocks have been on a big tear, climbing almost 20%.
The most likely rumored candidate is Guo Shuqing, a former regulator who is now the current governor of eastern Shandong province. During times of uncertainty, the government is more apt to select a candidate who they can rely on. This is Guo’s biggest asset, as President Xi can rely on him to steer monetary policy in a manner that is consistent with the central government’s best interests.
One of the criticisms of Zhou has been that he is too independent and too “Western.” Guo’s elevation would rather find a “Chinese facing” central banker, who would abandon many of Zhou’s Western inspired moves to liberalize financial markets and reform antiquated laws. Instead, Guo is more of a conservative, who would take China back to more centralized markets, using the levers of monetary policy to achieve growth targets.