A short update on political developments related to China and the US-China relationship.
Choice of China’s new central bank head is reassuring in context
Over the weekend, China announced that PAN Gongsheng, the deputy governor of the People’s Bank of China (PBOC), has been named the PBOC’s party secretary (its top political position). This likely means that Pan will also be appointed the governor of the PBOC, overseeing policy and operations. As party secretary he replaces GUO Shuqing; as governor he will replace YI Gang.
While Pan’s selection is a bit of a surprise, a change in leadership was expected as part of the five-year political cycle that started with the 20th Party Congress last fall. The two outgoing officials, Guo and Yi, were both at retirement age and due to step down. They have been among China’s most capable and respected financial officials, and their departure – along with the retirement in March of vice premier Liu He – marks a generational shift in China’s financial team.
Pan’s elevation is a choice of policy continuity and technocratic know-how, which in the context of China’s economic challenges and political dynamics should be considered reassuring. Pan does not have the stature or the dynamism of Yi Gang or his predecessor ZHOU Xiaochuan, which could be liabilities when it comes to navigating the institutional and political pressures on PBOC and continuing incremental (but still very important) financial reforms.
However, his broad experience makes him a highly qualified choice, and significantly better than some of the other candidates in the running:
- Pan has been a deputy governor at PBOC since 2012, where he has worked on issues including real estate and fintech regulation.
- Since 2015 he has been double hatted as the head of SAFE (State Administration for Foreign Exchange), which managed PBOC’s reserves. This is a role that involves close coordination with China’s exchange rate policies and close monitoring of global market developments.
- Prior to arriving at PBOC, he worked at two of China’s big-four state-owned commercial banks (ICBC and Agricultural Bank of China), including during their exhaustive preparations to go public.
This background is important given the myriad challenges facing PBOC and financial and monetary policy, including: supporting a faltering economic recovery without exacerbating financial risks; addressing mounting pressures on the currency (see HERE); and navigating the ongoing stress on financial stability from the real estate downturn, local government debt burdens (see HERE) and weakness at smaller city and rural banks in China. The fact that Pan has experience facing markets and working with international counterparts is also important given that Beijing’s communication with markets, always a weak point, has worsened further with the retirement of vice premier Liu He (our tribute to Liu’s role as a communicator is HERE).
It is helpful that Pan seems set to wear the hats of both party secretary and governor; this had been the norm until recently and it strengthens his political position in a period where PBOC risks seeing its authority diminished. In March, Beijing announced a revamp of its financial regulatory structure, including a move to centralize overall policymaking under a new Party apparatus (the Central Financial Commission) and to give new authorities to the banking and insurance regulator, somewhat at PBOC’s expense (see HERE for our analysis from March).
It is unlikely that the change in leadership at PBOC will lead to shifts in key macro policies, including stimulus, especially in the near term. As noted, Pan is a choice that signals a preference for continuity. More broadly, PBOC does not operate at all independently, meaning the overall policy direction is decided by senior leaders. But Pan should be a solid choice to competently implement the current policy agenda, lowering the tail risk of policy error relative to a scenario in which a less experienced candidate takes the helm.
Yellen’s China trip is largely about communication – and we’ll take it
Treasury Secretary Janet Yellen will visit China this week, part of the “mini-thaw” ushered in by Secretary of State Antony Blinken’s visit to China last month (see our analysis HERE).
One should not expect Yellen’s trip to yield concrete deliverables for the bilateral economic relationship. The conversation may be a little easier around multilateral issues such as debt relief for developing countries and climate finance.
The most contentious bilateral economic issues – tariffs and export controls – are not in Yellen’s portfolio, and very unlikely to change given the tense state of the relationship, the domestic political sentiment in the US towards China, and Beijing’s limited willingness to make major concessions to Washington. The main bilateral economic issues that Yellen does oversee – investment security reviews and financial sanctions – are tightly wrapped up in national security concerns, with little-to-no room for negotiation. This summer, President Biden is likely to issue an executive order that scrutinizes and in some cases limits US direct investment in some critical sectors in China such as semiconductors, with these authorities under Yellen’s purview at Treasury (our write-up from April is HERE).
Yellen’s trip has the more modest, but still very important goal, of establishing channels of communication with China’s new economic team. Her direct counterpart is likely to be vice premier HE Lifeng, who has assumed the financial sector portfolio and US-China economic relationship from the retiring Liu He. In her meetings with He, Pan (the new PBOC head), Minister of Finance LIU Kun, and other officials, Yellen will look to explain US policies and to understand Beijing’s evolving priorities.
Such conversations will help to reduce the potential for miscalculation and misunderstanding – including on issues such as Beijing’s economic and technological support for Moscow, where the potential for China to cross US redlines could result in significant sanctions and export control risks.
And while not sexy, “macroeconomic dialogue” between the two world’s largest economies is quite beneficial. Yellen and her Chinese counterparts will compare notes on domestic economic conditions and policies, a conversation that Beijing is likely to welcome given that slowing US imports and Fed hikes are adding to China’s complicated outlook. Should the stresses on China’s economy intensify in coming quarters, having such channels in place – so that Yellen can call vice premier He, or vice versa as necessary – will be important for reducing uncertainty for global markets.
