New head of the People’s Bank
20 March 2018
Those watching China will know that the “two sessions” officially closes today after a sometimes intense, sometimes boring, but always insightful two weeks. The meetings ended with a flurry of personnel announcements that will shape policy over (at least) the next five years. Among the announcements, the economic and financial team have finally taken shape. As expected, Liu He, Xi Jinping’s chief economic adviser, was appointed to vice premier in charge of financial sector and economic planning, meaning he will likely also take the reins of the newly established Financial Stability and Development Commission. While this was largely expected, Zhou Xiaochuan’s replacement as governor of the People’s Bank of China (PBOC) was still a mystery up until the moment it was announced. To the surprise of many, Yi Gang, the current deputy governor, was selected to be the next governor. Given the importance of the PBOC within the wider policymaking system and the fact that the PBOC’s mandate is among the broadest of any major central bank, the selection of next governor carries broad significance. Widely viewed as a strong vote for policy continuity and monetary policy competence, Yi Gang’s appointment keeps a technocratic monetary policymaker at the helm of the PBOC. While largely positive, the next governor of the PBOC still undoubtedly faces a long list of challenges.
To start with the positives, Yi has served at the PBOC for over 20 years including 10 as deputy governor, giving him a wide breadth of experience, especially as China’s monetary policy framework has evolved in recent years. Policy has shown flexibility over recent months, with interbank rates surprising on the dovish side (see Chart 10) and PBOC lending facilities such as the Pledged Supplementary Lending Facility and Medium-term Lending Facility, two tools the PBOC uses to target market rates while boosting liquidity, providing support to the real economy (see Chart 11). This recent slightly dovish bias could partly be to offset the impact of hawkish regulatory changes, implying a policy flexibility that will be needed as regulatory tightening continues. As one of the architects of China’s monetary policy framework, including the move away from quantitative tools towards market-based tools, Yi is perfectly positioned to carry out implementation and minimise operational risks. Lastly, Yi has a track record of reform, including from his time as the head of SAFE, and could continue to use the PBOC to sponsor greater financial liberalisation.
However, the last point could also be a challenge. Under Zhou, the PBOC had been a strong proponent of financial sector liberalisation and market-based reforms; as anyone with experience in bureaucracy understands, difficult changes require considerable political capital. Yi’s relative lack of political seniority compared to past governors runs the risk of potentially eroding some of the PBOC’s newfound policy independence as well as making it more difficult for the PBOC to drive unpopular reforms. While Yi brings considerable technical skills to the job, these will certainly be tested as China continues to face longstanding structural challenges – the PBOC walks a fine line of balancing growth imperatives while trying to control leverage, as well as targeting currency stability while the US is raising rates. These challenges will not become any easier.