Central Planning Failure: China’s PBOC Edition

China’s central bank has reportedly been desperately seeking an accurate way to measure her ever changing money supply conditions

From the Wall Street Journal Real Time Economics Blog (bold mine)

Three years after China’s central bank unveiled a new measure to calculate the amount of credit in the economy, it may be going back to the drawing board.

Pan Gongsheng, a vice governor at the People’s Bank of China, said this week that the financial sector has rolled out so many innovative products in recent years that it has become much more difficult to calculate the nation’s money supply.

The PBOC didn’t name names, but recent financial innovations have included wealth management products and fast-growing online investment funds like Yu’e Bao – all of them offering investors higher returns than traditional bank deposits.

Such innovations “have affected the accuracy, completeness and scientific methodology of money-supply calculations,” Mr. Pan said Thursday at a meeting of financial regulators and academics. “Hence we need to improve the financial calculation mechanism so as to better serve macro financial regulation and prevent systemic risks.”

Mr. Pan said regulators would set up a unified and comprehensive calculation system for the financial sector, but didn’t give further details.

If this all sounds vaguely familiar – well, it should.

Three years ago, unhappy with its existing tools for measuring domestic credit, the PBOC rolled out what it called total social financing, or TSF, trumpeted as a more representative measure than total bank loans or M2 (broad money supply).

The explanation for the change was a good one: Bank loans are no longer the overwhelming source of credit in China’s financial system.  Last year, they made up only about 51% of total new financing.

“In recent years our financial aggregates have expanded rapidly along with a diversification of financial institutions,” the PBOC said when it introduced the TSF measure. “The number of financial products and financial tools has increased amid continuous innovation… There has been a marked upturn in off-balance sheet business, and that is replacing some of the role of bank loans.”

In addition to bank loans, TSF included newer categories such as trust lending, entrusted loans – or credits between companies – and bankers’ acceptances, to name a few items.

Since its introduction, the TSF measure has faced plenty of controversy in academic circles. Debate has focused on whether the gauge covers enough of the nation’s credit, whether it double-counts some components and whether it creates distorted data.

Two insights from the above

One. Markets are always a step ahead of the regulators, where the latter always play a cat-and-mouse dynamic.

Two. The above serve as another example why government statistics can’t be trusted or relied on.

The PBoC should heed the great Austrian economist F.A Hayek advice on central planning (Fatal Conceit)

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.