China’s two-headed central bank raises many questions
President Xi Jinping's latest move involving the People’s Bank of China could be a stroke of genius, or it could end in an intellectual muddle
Leave it to China to take the two-heads-are-better-than-one maxim to new heights. President Xi Jinping did just that by naming Guo Shuqing Communist Party secretary of the People’s Bank of China.
It also dispelled a mystery: why Beijing’s top bank regulator appeared to get passed over on March 19. Guo had been the favorite to replace highly-respected PBOC Governor Zhou Xiaochuan. Instead, economist Yi Gang was given the gig.
Now we know why. Xi wedged Guo in between Yi and the man to which they both report: economy czar Liu He, who essentially is now the second most powerful man in China, eclipsing even Premier Li Keqiang.
Yet all this raises a new mystery as China reckons two PBOC leaders are better one: how exactly is this going to work?
First, the optimistic case. China long fancied creating a financial super-regulator. Putting the reformist Guo on top of Yi at the PBOC amounts to approximately just that. Guo has a uniquely varied resume, having run Shandong province, headed securities regulation, directed the state agency that oversees Beijing’s $3 trillion of currency reserves and chaired China Construction Bank. During his time at the China Banking Regulatory Commission, Guo altered lending practices, policed industry malpractice and made financial products less opaque.
There’s good reason to think that Guo working with Yi can accelerate the market-opening steps Zhou pursued in his 15 years at the helm. Topping their to-do list: curbing risk in banking and insurance; raising the yuan’s global game; increasing the efficiency and transparency of monetary policy; and squeezing excesses from Asia’s biggest economy.
Yi will handle the money supply and exchange rate issues and attend global meetings and summits. Guo can keep his eye on the bigger picture: coordinating actions among financial agencies; keeping institutions in line; ensure Xi’s cabinet is pursuing structural reforms. And, where necessary, the two can play good cop/bad cop to chasten misbehaving actors.
The less optimistic take: though a Guo-Yi tag-team could be a boon for reform, it makes for a confusing dynamic. Miscommunication risks abound for the yuan, efforts to manage Beijing’s dueling bubbles in credit, debt and property and policies to strengthen stock-market fundamentals.
Guo has, at times, put his foot in his mouth. A May 2017 joke where Guo said he knew more about toilet design in rural China than banking supervision left many puzzled. He sent waves of panic through bond and stock markets with talk of a “regulatory storm” to come. So did assertive moves to curb interbank borrowing and lending and confusion-sowing comments on Beijing’s currency reserves.
And what if Guo and Yi differ on how best to tighten credit or stimulate growth? For 15 years now, Zhou made these calls. He also was the face of China Inc. spanning three mainland presidents, four Federal Reserve chairs and three European Central Bank heads. Zhou was the longest-serving monetary leader among the Group of 20 nations.
In that time, Zhou managed to end the yuan’s dollar peg, modernize monetary policy tools, scrap caps on deposit rates and win entry into the International Monetary Fund’s reserve-currency matrix. Yi won’t have the same gravitas when traveling abroad to articulate PBOC policies and thinking. Not when Guo back in Beijing has the final say on strategy and veto powers.
Guo, it’s worth noting then, reports to Vice Premier Liu, who ultimately bows to a newly super-sized President Xi. All this marks a notable change in direction. A week ago, the buzz was about the PBOC earning greater independence. Now, intrigue surrounds an ever-growing roster of cooks in the monetary kitchen.
Again, a Guo-Yi team helming the PBOC could end up being a stroke of genius, one that accelerates China’s evolution toward market-economy status. Or it could set the stage for an intellectual muddle that leaves global investors with more confusion than clarity.