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In 2025, the People's Bank of China finds itself in a position no central bank relishes: making things up as it goes along.
PBOC Governor Pan Gongsheng isn't the only monetary policymaker who can't wait to see the back of this year. Federal Reserve Chair Jerome Powell isn't having a great time as the U.S. president angles to replace him.
In Tokyo, Bank of Japan Governor Kazuo Ueda is having his own Trump troubles. In Ueda's case, it's President Trump's firehose of tariffs. He started the year on a path to be the hero who finally put Japan's deflationary era policies in the rearview mirror. Now, the BOJ's normalization process is in limbo.
Yet Pan's challenges are decidedly unique, and not just because China is facing deflation. It's because the PBOC is facing a series of diverging crosswinds without much latitude to do what policymakers see as needed to stabilize Asia's biggest economy.
Take, for example, borrowing costs. Given the weakness in mainland inflation and a property crisis that continues to fester, Pan arguably should be easing at virtually every opportunity. That, however, might send the yuan tumbling in ways that enrage Trump.
Until now, Chinese leader Xi Jinping has cagily strung Trump along -- even scoring yet another 90-day extension on trade deal talks. Odds are very good that come November, Team Xi will get another 90 days, dragging preliminary negotiations well into 2026.
In the interim, Xi is loath to troll Trump World into fresh confrontation. Arguably, the quickest way would be for Treasury Secretary Scott Bessent and trade adviser Peter Navarro to inform Trump that Beijing might be manipulating exchange rates for trade advantage.
Also, Team Xi has been reluctant to let the PBOC add stimulus for fear of setting back years of efforts to reduce leverage in the economy. Something has to give, of course, as growth slows across the board. In July, retail sales, factory output, new home sales and fixed-asset investment all showed signs of sputtering.
Worse, China Evergrande Group is back in the global headlines. Its giant 2021 default came to symbolize China's real estate bust. Later this month, its Hong Kong stock will be delisted. At the same time, the glacial pace at which Xi is addressing the property crisis is a key reason why many worry China risks a Japan-like malaise.
"The ongoing challenges in the real estate sector, though anticipated, are still concerning due to the sector's critical role in driving consumption through wealth effects, particularly as 60% of domestic household wealth is tied to real estate," says Carlos Casanova, senior economist at Union Bancaire Privée.
On one level, the PBOC pulling its monetary punches could be viewed as wise. Twenty-six years later, Japan is still struggling to move rates away from zero. The BOJ's quantitative easing policy is backfiring. It deadened the urgency to reform the economy or innovate Japan's way back to sustainable and healthy growth. Now, QE is acting like economic quicksand as the BOJ struggles to escape.
Also, China's biggest problems are beyond the PBOC's influence. Only Xi's team can recalibrate growth engines from exports to services, reduce near-record youth unemployment, incentivize local governments to raise economic growth around the country, and give households the confidence to save less and spend more.
Still, deflation is a bigger risk than mainland officials seem to admit. It requires a multi-pronged effort, led by powerful monetary support. As Japan reminds us, time is not on China's side.
Odds are, Pan knows this. But since big PBOC decisions are made well above his pay grade, all Pan can do is hope 2025 ends without China sliding further towards a Japan-like funk.