What China's new governor should do
Five tips for Zhou's successor Yi Gang
by David Marsh in Prague, Adam Cotter in Singapore and John Adams in London
Tue 20 Mar 2018
Yi Gang, the new governor of the People's Bank of China, must discharge some important unfinished business in his country – and meet additional global challenges only now emerging.
Yi, 60, takes over from Zhou Xiaochuan, retiring aged 70 after 15 years in the job, at a time when Beijing is placing greater emphasis on controlling risk in a Chinese financial system that even leading officials admit contains dangers of implosion.
At the same time, in view of a leadership vacuum in world politics and economics stemming from US unilateralism, opportunities for China from its own brand of targeted monetary internationalism are greater than ever. As a former head of the State Administration of Foreign Exchange, which manages China's $3.1tn stock of foreign currency reserves, Yi has a natural leaning towards international affairs.
Domestic preoccupations will however loom large. Concentration of political, economic and financial power is now firmly with the Communist party, with President Xi Jinping at its head. The government's control of currency and monetary policy is likely to strengthen further under the stewardship of Vice-Premier Liu He, now given wider powers as the country's supreme economic technocrat.
Although far from enjoying the independence of his western counterparts, Zhou, softly spoken and persuasive on the world stage, had been at the forefront of an unparalleled period of Chinese expansion and liberalisation.
The task now for US-educated Yi – a deputy governor since 2008 – is to continue this progress while assuring investors and policy-makers that China is a safe place to deposit assets and build businesses. He will also form part of the effort to show the US, Europe and the rest of Asia that Beijing can be entrusted with a rising share of world economic decision-making, in the absence of coherence in the US.
Here are five recommendations for Yi:
1. Intensify attempts to rein in mounting debt through strengthening watchdog activities – where the PBoC has recently been given enhanced regulatory powers – and promote financial sector reform. Zhou and other officials have often highlighted asset bubbles, dangers from shadow banking activities and high debt among corporates and households. Yi must show he can preside over effective remedial action.
2. Make a special effort over curbing hazards in public private partnerships – a fast-growing area of the Chinese economy that has expanded partly because local authorities have been trying to offload debt towards private investors. PPPs are a hidden danger for Chinese borrowers, lenders and regulators that will grow over time. Although this form of buttressing growth through new vehicles for debt and equity financing has its uses, Yi should show he is aware that it could become addictive and even lethal. Many PPP legal contracts are poorly understood and unenforceable.
3. Enhance efforts at currency internationalisation, continuing the renminbi's advance after becoming part of the International Monetary Fund's special drawing right in October 2016. Providing a framework for capital market inflows and outflows, within the constraints of China's continuing capital controls, could provide a bubble-mitigating safety valve for pent-up domestic investment demand. This would also create a way for international investors, including central banks and sovereign funds, to diversify assets.
4. Build on existing campaigns to reinforce international monetary co-operation. The sometimes-mooted idea of building a currency swap network with the US Federal Reserve seems unlikely to materialise. However, partly because of worries about US unilateralism, Japan and China appear to be trying to improve co-operation as well as bilateral portfolio investment. In line with an increase in regional trade and Asian financial collaboration, Yi could step up similar efforts elsewhere in Asia, including through the Belt and Road initiative. Some observers say this vaunted plan to expand infrastructure investment throughout Eurasia could itself become an untameable source of risk.
5. Strengthen initiatives on improving transparency and reliability of Chinese economic statistics. Under Zhou's tenure, China has made considerable strides, for example in improving Beijing's co-operation with the IMF, the Bank for International Settlements and other bodies. More could be done to heighten the credibility of mainstream economic data. Yi could support efforts to improve understanding of how central banks are holding a greater number of reserve currencies – including the renminbi – as well as gold, in line with the PBoC's own considerable reserve diversification over the past decade.
David Marsh is Chairman of OMFIF. Adam Cotter is Head of Asia at OMFIF. John Adams is Chief Executive of China Financial Services and a Member of the OMFIF Advisory Board.
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