The world has grown used to the idea that China’s leaders are masterful stewards of their gargantuan economy. They steered brilliantly around the iceberg of the 2008 financial crisis, maintaining growth of near-double-digit rates. So when People’s Bank of China chief Zhou Xiaochuan began clamping down on excessive liquidity last week, some observers viewed him as a Chinese Paul Volcker. Now that the worst was over, Zhou seemed to indicate, it was time for China to rein in lending and prevent a credit bubble from swelling.

Then reality intervened. After the overnight repurchase rate zoomed to a record 13.91 percent, Zhou had to back off, hastily injecting fresh funds to stem the turmoil. The chaos traumatized money markets. Some were dismayed by signs that Zhou would end the era of easy money in China. Others feared that he couldn’t.

Indeed, continuing unease this week underscores how limited Zhou’s powers actually are. Over the past decade, China’s economy has grown addicted to excessive credit growth, with state-owned banks encouraged to finance as many new skyscrapers, highways, airports, dams and ghost towns as needed to pump up gross domestic product. Free-flowing liquidity -- mostly to state-owned enterprises -- kept stocks and real estate buoyant, foreign investors bullish and China’s 1.3 billion people away from Tiananmen Square.

Zhou can’t cut off the money now without banks suffering from withdrawal. And the danger is that nobody really knows how healthy China’s giant, state-owned banks are, or how big its shadow-financing system has grown. When Stephen Green of Standard Chartered Plc in Hong Kong called China’s credit system “a big black box, and it’s quite scary,” he wasn’t exaggerating.

Mystery Data

How can anyone trust that China is growing at a rate of 7.7 percent, as the government claims, when crucial variables in its data tabulation are a mystery? Bank of America Corp. economist Lu Ting in Hong Kong risked China’s ire by alleging its trade surplus was 1/10 the $61 billion it reported as of mid-May. The nobody-knows character of China’s credit system -- quantity, quality or excesses -- is even more worrisome.

The U.S. shadow-banking system, with its off-balance-sheet vehicles and murky dealings, helped drive world markets off the rails in 2008. Imagine the damage an entire shadow economy could cause if it unravels.

China’s leaders avoided bursting one bubble in 2008 by creating new ones. Yet China cannot forever delay its day of reckoning. Total credit may reach 200 percent of GDP this quarter, up from 130 percent in 2008. Mainland banks are currently adding assets at the rate of an entire U.S. banking system every five years.

Traditionally, Beijing has viewed opacity as a powerful tool for policing the channeling of funds between banks and companies. That murkiness is now proving dangerous. The central bank needs to confirm it will rein in interbank liquidity, explain the means by which it plans to do so, and indicate what the endgame is. Its vague, boilerplate statements are only exacerbating distress in the markets.

At the same time, Zhou is fundamentally helpless: He cannot be truly effective unless the country’s top political leadership decides that the Communist Party is going to get out of the banking business. China needs to allocate capital less recklessly and price it according to economic reality, not according to the dictates of officials who profit from the current arrangement. If the government really wants to reduce the role of state-run companies in China’s economy -- as it should, because only a thriving private sector can increase innovation and competitiveness -- it must privatize the banks first.

Powerful Creature

Putting off that hard task has turned the Chinese economy into a Frankenstein monster. It’s a giant and powerful creature born of unorthodox experiments, and its makers are increasingly losing control.

No one envies Chinese President Xi Jinping and Premier Li Keqiang. They must manage a slowing economy and institute critical reforms, all without panicking the markets and destabilizing Chinese society. They should study the precedent set by former premier Zhu Rongji, whose efforts to modernize state-owned enterprises in the late 1990s put more than 40 million Chinese out of work but added much-needed balance to the economy.

Any shock therapy will be painful. And to be effective, it must treat the underlying problem, not just the symptoms. Otherwise, Zhou’s every effort to drain credit will only send waves of panic through the markets. He’s right that China’s Frankenstein needs to be stopped. But only its creators can do that.

(William Pesek is a Bloomberg View columnist.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.

To contact the editor responsible for this article: Nisid Hajari at nhajari@bloomberg.net.