Given all that has transpired in China this past year, year and a half it is likely that confusion will continue if only due to bias and preconceptions about “omniscience” in central banking. For my part, the PBOC has been unusually open and candid about “what” it is doing, particularly in the framework of the high degree of secrecy under which the Chinese central bank almost always operates. That it has been very public about “reform”, in contrast, is itself highly indicative of what they want to accomplish.

The less obvious and direct part is the “why.” On the surface that seems to be almost as straightforward as “reform”; in other words bubbles simply don’t work and they want to try to manage them as best they can before it gets wholly out of control and, more importantly, irreversible. That is true, but it is also a pattern that has been seen and done before, to which the Chinese are very much aware but apparently loathe (or forbidden) to directly address.

I have not written before about this element of what I see as the impetus for “reform” in China because it is mostly conjecture on my part. Here you have to engage a lot of study and put some disparate pieces together (which subjects your analysis to your own bias, which is why it’s nothing more than conjecture). Unlike the monetary policies they have engaged in 2014, the underpinnings of the philosophical shift have never, to my knowledge, been outwardly admitted by the PBOC or anyone in power. Nor do I expect them ever to do so. In that sense, this is about as close to connecting dots or reading between lines as you can get and maintain logical consistency with stated goals and activated monetary experimentation as it exists now.

With that caveat acknowledged at the forefront, I get the distinct impression that the PBOC fears, very highly, that they may be Japan 1989. By engaging in reform, they think that maybe they could be closer to Japan 1987, and thus still within the bubble years but not far enough along to preclude a change of course before the dreaded point-of-no-return. That is the great experiment here; can China be saved or is the iceberg already too close to steer out of it?

That is immensely relevant not just to everything taking place in China, but the spillover to the world at large. Again, the most visible piece is the first assumption, that the PBOC has no doubt the iceberg exists and is already in close proximity. I get the sense that applies in varying degrees to other central banks, but in China it is a radical change.

Of course, for the Chinese gov’t this is paramount. Unlike Japan, there will be no stability if China follows Japan in the 1990’s – that would be game over for the gov’t and they well know it. That’s why, at least in the disparate pieces you can fit indirectly together, they will be emphasizing bubble fighting even at the short-term expense of “growth.” Better to try to live through slow-growth (hopefully) and pay full attention to diverting asset imbalances rather than what Japan did after 1989.

What that means in terms of actual operation is to try and buttress anything that can be of use for the economy that will “survive” at the direct expense of anything that fortifies wasteful speculation. Unfortunately, it is not anywhere that simple. A good deal of what is deemed “useful” in Chinese finance also takes on an element of speculation and imbalance. Thus the PBOC placed almost all of their focus in 2014 trying to gain a hold of that separation, and where there may be avenues for more constructive effort. The series of “tests” have yet to be a serious challenge to the bubbles themselves because, in my mind, the central bank is not yet confident that enough preparation has been made to withstand what is coming.

However, if I am right about this, then they fully realize that time is running short. There is a world of difference between Japan 1987 and Japan 1989, and the PBOC does not want to miss the exit and be stuck on an irrevocable path to three decades of mired uselessness. What they are attempting, again in this context of speculation on my part, is not just unprecedented but incredibly delicate. The lack of growth in the rest of the world is both an impetus and a curse; it makes this attempt necessary but also that much more difficult.

With all that in mind, if the PBOC ramps up the “tightening” part against speculation and imbalance sooner rather than leaving it for another year, then we can assume they judge Japan 1989, and the end of any margin for error, to be too close at hand.