The Governor of the People’s Bank of China, Zhou Xiaochuan, has lashed out at local governments, saying their constant calls for looser monetary policy are the root cause of the country’s financial fragility. Zhou, who has been PBOC Governor for the last 15 years, said the central bank had been expected to turn on the cash taps to support growth in good times and in bad.

“In the good times all industries and local governments enthusiastically pursued rapid growth and demanded the central bank ease money supply,” Zhou wrote in an article on the central bank’s website. As a result, financing activities boomed, credit supply increased, and market players started to be overly optimistic, “generating asset price bubbles”. But as risks mounted and financial markets came under pressure, all sides called for the PBOC to come to the rescue with looser monetary policy, Zhou wrote. He said this distortion of monetary policy, mainly from local governments eager to speed up development, was a source of systemic risk because of the high financial leverage and excessive corporate debt it induced. Zhou called for broadened equity funding and direct finance to cut corporate leverage and eliminate “zombie” companies. He also warned that it was very difficult for regulators to find a big enough window of time to “right the wrongs”.

Zhou is expected to step down in the coming months. He is credited with steering the country’s robust economic growth in the past 15 years, freeing up interest rates at home and earning the yuan nominal international reserve currency status abroad. But he has also been criticized for allowing the economy to be flooded with money – China’s broad money supply, M2, surged from CNY18.5 trillion at the end of 2002 to CNY165.6 trillion at the end of September, the South China Morning Post reports.