Please summarize article in five sentences

Chinas Central Bank Must Act on Debt Bubble

Governor Zhou Xiaochuan has the clout to convince Beijing to curb its worst excesses and avoid a calamity.

Zhou Xiaochuan, governor of the People's Bank of China Photographer: Andrew Harrer/Bloomberg

It wasnt quite Beijings irrational exuberance moment. In his 14-plus years running the Peoples Bank of China, Zhou Xiaochuan has long favored quiet hints to market-shaking pronouncements. But there was something quietly provocative about the central banks Feb. 17 statement.

The liberal use of the words bubble and debt risk stood out, for starters. The real intrigue concerns what the PBoC is doing stealthily behind the scenes. On Feb. 3, Zhous team hiked interest rates on open-market operations and funds lent through the so-called standing lending facility. The entire yield curve rose as investors internalized the PBoCs monetary austerity message.

Ten days later, data shed light on the move: China in January added more than the equivalent of Argentinas annual output, roughly $545 billion. In other words, the price Beijing is paying to keep growth close to 7% is surging before investors eyes, as are potential imbalances. Enter Zhous central bank staff, which on Friday said it will increase monitoring of corporate debt risk, bank asset quality and liquidity, abnormal stock market fluctuations, use of insurance funds, property bubble risks as well as cross-border capital flows. The PBoC also called for a new mechanism to facilitate healthier housing financing methods.

Market observers quickly circled the wagons, assuring investors no big PBoC rate hikes are coming. As the central bank balances rapid growth with curbing leverage, the conventional wisdom says, itll avoid bold tightening moves. But is that really possible given the ongoing credit explosion on top of the dueling bubbles vying for Zhous urgent attention? Whether Fridays statement suggests a throwing down of the gauntlet is anyones guess. I cant help but wonder, though, if Zhou is finding his mojo and that monetary activism is afoot.

No one thinks the PBoC is independent. Of course, what does central bank autonomy even mean in the age of quantitative easing? The Bank of Japan, lets face it, is Prime Minister Shinzo Abes ATM. The European Central Bank is effectively subsidizing a growing number of embattled governments. And Janet Yellens latitude to normalize U.S. rates is under threat from Donald Trumps White House. But Zhou, remember, is the most enthusiastic and advantageously placed reformer in Beijing. If he cant counsel a dose of sobriety then Asias biggest economy is doomed to a debt-crisis trajectory.

Getting the yuan included in the International Monetary Funds special drawing rights program was Zhous baby. A disciple of Zhu Rongji, Chinas greatest reformer since the late 1970s, Zhou knew that once inside IMF conventions, Beijing had to internationalize its economy. Zhous also been around the block enough times to understand that trying to regulate money supply flows in todays world of QE, porous capital accounts and rampant financial imbalances is next to impossible. What the PBoC can do, though, is tweak interest rates, intensify so-called macroprudentual regulations and learn from past episodes.

Already, China is grappling with an economy thats more Frankenstein monster than first-world power - one born of years of overlapping and unorthodox experiments thats becoming harder to control.

One such lesson is the above-mentioned irrational exuberance episode of 20 years ago. When then-Federal Reserve Chairman Alan Greenspan uttered that phrase, markets quaked and politicians raged. He never went there again. Instead, Greenspan and successor Ben Bernanke again and again filled the punchbowl, when they shouldve been yanking it away. Bubbles formed in stocks, housing, debt and speculative exuberance. The Feds largess also deadened the urgency for lawmakers to restructuring the economy.

Thats where China finds itself today: squarely in bubble maintenance mode, when it should be recalibrating engines toward consumer demand and away from credit and debt. Sadly, President Xi Jinpings promise of a pro-market revolution has gone almost nowhere these last three years, leaving Beijing stumbling from debt surge to debt surge. That leaves Zhou in an untenable situation: keep pumping with abandon, or work to put China on a more sustainable path. Already, China is grappling with an economy thats more Frankenstein monster than first-world power - one born of years of overlapping and unorthodox experiments thats becoming harder to control.

Only Zhou can do it. Granted, he lacks the autonomy in Chinas communist system to pull a Paul Volcker on the place. Volcker, Greenspans predecessor, was Washingtons monetary moralist to Greenspans obliging bartender. But Zhous gravitas in global circles makes him uniquely suited to make the case to Xi and top Communist Party cadres. He should put that political currency to use lobbying Beijing to act.

At next months National Peoples Congress, officials are expected to mull ways to reduce leverage. Zhou should prod them to give policies real teeth, including allowing the yuan to rise. A rising exchange rate would drain froth from Beijings bubbles and placate a Trump White House agitating for a trade war. Whats more, it could accelerate the shift from manufacturing to services that Xi pledged to engineer.

If Zhou doesnt announce last call, and soon, irrationality will reign at a time when China needs to curb its worst excesses.