China’s annual National People’s Congress (NPC) kicks off on 5 March. We will preview our expectations for the NPC and the market implications in a note and Webinar next week. This note looks at recent speculation on potential changes to China’s financial team and regulatory structure at the NPC.
As in past years the NPC will set China’s key economic targets, including for the GDP growth rate and fiscal deficit, and broader policies for the year. That policy mix will be important for assessing whether our current expectations for China’s growth are on track. We expect a rebound driven by consumption and especially services, with less positive spillovers to global growth than a cycle driven by manufacturing and investment (please see: Avoid excessive optimism about “excess saving”, 19 January). Our preview note will discuss key watchpoints for NPC targets in more detail.
Beyond targets, this particular NPC meeting has outsized significance due to China’s five-year political calendar. The 20th Party Congress last October appointed senior Party leaders, and the NPC will complete the leadership cycle with a new round of government postings. It may also announce significant changes to the China’s regulatory apparatus, which Party leaders will discuss in a plenum meeting on 26-28 February.
Both the WSJ (link here) and Bloomberg News (link here) have pieces out this week on the changes ahead for financial officials and the structure in which they operate. They point in a similar direction:
- HE Lifeng will replace LIU He as the vice premier with primary responsibility for financial and economic policy (this has long been 22V’s expectation).
- WSJ reports that HE will be double-hatted as the party secretary of the PBOC (its political head), replacing GUO Shuqing in this role. This would be an unusual arrangement that boosts the political heft of the PBOC though could undermine its technocratic orientation.
- ZHU Hexin will replace Yi Gang as the PBOC governor, which has been widely expected. Zhu, currently the chairman of CITIC, is an experienced banker but lacks Yi’s expertise in monetary policy and his stature in international financial circles.
- In terms of regulatory structure, both reports suggest China may revive the Central Financial Work Commission, a policy steering body that existed from 1998 to 2003. This would presumably strengthen coordination on financial regulatory issues between agencies and perhaps between the central and local governments (where it is most needed). The media are reporting that Ding Xuexiang, the executive vice premier, or Li Qiang, the premier, could oversee the body. Both are key Xi proteges, as is He Lifeng.
What to make of these changes? It is wise to save strong convictions for when the appointments are confirmed and with more context as to the logic. Even then, one should be humble in forecasting how personnel changes map to actual policy outcomes in China. Still, here are a few initial thoughts in the meantime.
While media reports frame the moves as increasing Xi’s grip on the financial sector, the shifts would represent more of a generational change than Xi cleaning house. Vice premier Liu He, banking regulator and PBOC secretary Guo Shuqing, and PBOC governor Yi Gang are all due by age limits to step down; Xi has ways of keeping them on but choosing not to do so isn’t exceptional. The three are part of a core group of reform-minded officials that have overseen China’s financial reforms for the last 20 years and generally worked well with Xi since he came to power in 2012. Liu He is one of Xi’s closest advisors and is likely to stay influential but without direct financial responsibilities.
The team going out is more technocratic, experienced, and international than the team coming in. This matters in some areas more than others (discuss below). The overall direction of financial policy will likely follow Xi’s priorities for the sector. I would list these priorities in order of importance to Xi as:
- Ensuring that the financial sector remains stable as well as firmly under the Party’s control
- Promoting Xi’s drive for an innovation-led economy
- Reducing China’s dependence on the US dollar financial system, and boosting Beijing’s financial influence, over time
These goals are somewhat in tension, such as the conflict between #1 and #3: a reluctance to remove capital controls (stability imperative) hampers the growth of the RMB as an international reserve currency. Indeed, it would not surprise me if, under the new team, the RMB incrementally gains additional international use for largely geopolitical reasons (e.g., working with Russia and some other countries to counter US sanctions) but progresses only slowly in the reforms necessary to boost reserve currency status.
In terms of market implications, my hypotheses (low conviction at this stage) are that financial policies under the new team will be:
- Only moderately more pro-growth. There is an argument that the departure of Liu He and Guo Shuqing, who are notably hawkish on controlling financial risks, paves the way for less restrictive credit and monetary policies. I would expect any such changes to be marginal. Avoiding systemic risks is now fully hard-wired into Xi’s agenda, with financial stability regarded as a component of national security. China’s debt levels are high and have risen since the pandemic, and Xi continues to stress financial discipline (one reason why we expect new stimulus to be modest this year). A return to rapid credit growth and loose policy is extremely unlikely.
- More internally focused. China’s opening up to foreign financial services firms and foreign portfolio investors could slow but is unlikely to stop or reverse. A subtle but important issue is that the new team is less of a known quantity both to markets and to international interlocutors. It is unclear how willing they will be to communicate to investors and to counterparts in times of stress, a role that Liu He in particular often filled. Lack of external communication would amplify shocks from China to global markets.
- Potentially better coordinated. One way that a revived central financial work commission could improve on the current structure (the Financial Stability and Development Committee) is by improving coordination between the central government and local governments. This will be increasingly important given the necessity of restructuring stalled property projects and developers, weaknesses in regional banks, and growing debt risks around local government financing vehicles.
- Potentially less technocratic and reform minded. The outgoing team pursued gradual but important reforms to boost the flexibility of the RMB and capital account, shift from quota-based to interest rate-based monetary policy, and remove implicit government guarantees against defaults. The new team may be less ambitious in this regard but that remains to be seen. A danger worth monitoring is whether Xi and the new team more forcefully use the financial sector to promote industrial policy objectives; this would worsen existing distortions in how capital and credit are allocated within China.
In short, the above suggests financial sector policies that remain disciplined but are potentially less dynamic, transparent and market-oriented than the status quo. But these are trends that are likely to play out over the long term; the reality is likely to be nuanced and could be counter-intuitive. The NPC will provide important signals but may not be the last word: it is likely that China will hold a once-every-five years national financial work conference sometime after the NPC, which could be the venue for deeper institutional and financial reforms to be announced (if they come).
One final thought: at the big picture level, I would argue that the key challenges for China are less about financial sector policies per se than structural and fiscal issues. They include:
- The continued distortions caused by state-owned enterprises, which are less efficient than private firms but receive more capital, largely due to implicit guarantees; and
- a fiscal system that is overly reliant on land finance. This exacerbates risks from the property sector and off-balance sheet borrowing by local governments, while limiting the role of fiscal policy in promoting consumption.
Debates in these areas are also heating up and ultimately more critical to the outlook, especially over the long term.
