Beijing, March 19, 2018 – China elevated a key confidante of President Xi Jinping to one of the top positions in government on Monday as Beijing cracks down on riskier financing and a debt build-up that may pose systemic risks to the world’s second-largest economy.
The endorsement of Liu He as a vice premier by the country’s largely rubber-stamp parliament also comes as the United States presses China to cut its trade surplus by $100 billion. Harvard-educated Liu, 66, was the most prominent envoy to visit Washington recently to prevent the outbreak of a trade war.
While most of the personnel changes on the government’s economic team were widely anticipated, the choice of Yi Gang as the new head of the People’s Bank of China (PBOC) was unexpected.
Yi had been a vice governor of PBOC and a protege of outgoing chief Zhou Xiaochuan. His appointment was seen as pointing to continuity in monetary policy even as one of the world’s biggest central banks was gaining considerable new regulatory powers.
Yi will have a weighty first test – the U.S. Federal Reserve is expected to raise interest rates on March 21, a day after China’s annual parliament ends, and markets are keen to see if the PBOC follows with a modest move of its own.
The head of a newly merged banking and insurance regulator is also expected to be announced soon. Reform-minded Guo Shuqing, 61, the current chair of the China Banking Regulatory Commission, is viewed as the leading candidate.
Liu He is expected to help improve supervision and coordination among regulators and the central bank to fend off financial risks, as head of the cabinet-level Financial Stability and Development Commission (FSDC).
That would put Liu on a similar standing with former economic czar Zhu Rongji, known for his tough handling of hyperinflation and the economic chaos in the 1990s.
Zhu held both the posts of vice premier and central bank governor simultaneously from 1993 to 1995, and went on to become China’s premier in 1998-2003.
As Xi begins his second five-year term as president, Beijing is streamlining regulators and ministries to reduce inefficiencies while expanding the remit of others such as the central bank to boost their policymaking powers.
Xi has also promoted top graft-buster Wang Qishan, a major ally, to the post of vice president.
“China’s ministries are giant, nationwide silos and fiefdoms that never talk to one another,” Cliff Tan, east Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ, said in a note.
“Hence, in order to accomplish anything major, the command must come from the top down. Only they can get ministries to work together.”
Liu has a deep understanding of the country’s economic issues, and was elected last October into the 25-member Politburo, the second-highest tier in Beijing’s political power structure after the seven-member Politburo Standing Committee.
Liu won a top Chinese economics study award in 2015 for his research on the global financial crisis, and is widely seen as masterminding Xi’s supply-side reforms which are cutting excess factory capacity and pivoting the economy away from low-value industries.
Newly elected Vice Premiers (L-R) Hu Chunhua, Han Zheng, Sun Chunlan and Liu He take an oath to the constitution at the seventh plenary session of the National People's Congress (NPC) at the Great Hall of the People in Beijing, China March 19, 2018. REUTERS/Jason Lee
Liu, who speaks fluent English, gained a master’s degree in public administration at Harvard’s Kennedy School of Government in 1995.
He had been the head of the General Office of the ruling Communist Party’s Central Leading Group for Financial and Economic Affairs and a vice minister of the National Development and Reform Commission (NDRC) – China’s top economic planner.
U.S.-educated Yi Gang, 60, had been vice PBOC governor since 2008. He was seen as instrumental in steering monetary and currency policy, including the landmark devaluation of the yuan in 2015 and more recently a tightening in capital controls.
The PBOC and other regulators are trying to rein in risks from an increasingly complex financial system and a rapid build-up in debt without jolting markets or hurting economic growth.
“The main task right now is to implement prudent monetary policy, push forward financial sector reform and opening up, and keep the financial sector stable,” Yi told reporters on the sidelines of Monday’s parliament session.
Yi said PBOC would roll out policies and measures to reform and open up the financial sector between now and the next Boao Forum, known as Asia’s Davos, in April. He did not elaborate.
But Yi is not regarded as a heavyweight like his boss Zhou, and he may play a supportive role with Liu overseeing the economy and finance sector on the whole, some economists say.
Yi’s nomination is “a bit unexpected as he holds a relatively low political ranking as the alternative member of CPC Central Committee,” said Tommy Xie, China economist at OCBC Bank in Singapore. The committee is the largest of the party’s elite decision-making bodies.
“In terms of implication, we see policy continuation as Yi will support Liu He to drive economic reform. Both are the main driver to China’s reform in the past few years,” Xie said.
Yi, one of the highest-ranking “sea turtles” – a colloquialism for Chinese returning from overseas – has a PhD in economics from the University of Illinois. He was also the head of the State Administration of Foreign Exchange (SAFE) from 2009 to 2016.
With Yi’s background and his reputation of being pro-reform, his nomination would be good news for foreign investors, Xie said.
Zhou, 70, who is China’s longest-running central bank head, having taken the job in 2002, is expected to announce his retirement soon.
Separately, Liu Kun, head of the budget office of parliament, was picked to be the new finance minister, replacing Xiao Jie. Liu was formerly a vice finance minister.
Zhong Shan kept his portfolio as the commerce minister. He Lifeng was also chosen to stay as the head of NDRC. – Reuters