SUMMARY:
- The main surprise in China’s new cabinet is the retention of Yi Gang as central bank governor; while it is likely temporary, this leaves an experienced hand to help guide China’s recovery and reduces risk of policy errors.
- The vice premier overseeing financial policy is likely to be He Lifeng; the retirement of Liu He – “China’s Larry Summers” – likely won’t bring a major change in policies but could leave a big hole in credibly communicating China’s policies to markets and international counterparts.
- The NPC concludes on Monday with a speech by Xi and press conference by new premier Li Qiang, both of which will be important for understanding the policy outlook.
On Sunday, China’s National People’s Congress approved a new cabinet (State Council). There was major change at the top, with a new premier (LI Qiang) and set of vice premiers who oversee key areas of policy. The vice premier likely to oversee the financial sector is HE Lifeng, who replaces the very influential LIU He (more on that below). These changes were already in the cards at the 20th Party Congress in October.
There was more suspense at the next level down, the ministerial-level officials who oversee cabinet agencies. The surprise here was the degree of overall continuity. Several important incumbents stayed in their posts, including the governor of the People’s Bank of China (YI Gang), the finance minister (LIU Kun) and the commerce minister (WANG Wentao).
Yi leaves a steady hand at PBOC, for now
The most directly relevant appointment for markets was the decision to retain Yi Gang at PBOC. With Yi at the traditional retirement age of 65, most observers (including yours truly) had assumed he would step down. Instead, he was named to a post in China’s political advisory body that also allows him to stay on at PBOC past retirement.
This appointment is likely to be temporary rather than having Yi stay on for another five-year term, but it is nonetheless positive. Yi is highly competent and experienced, known and respected by markets and international counterparts. With so much turnover in other key roles, continuity here is a relief. It removes, for now, the risk of policy errors or poor communication from a change at PBOC.
Last week Beijing announced a significant overhaul of the financial regulatory apparatus, which includes transferring some supervisory responsibilities from PBOC to a new State Administration of Financial Regulation as well as streamlining PBOC’s branch structure (please see our coverage HERE). One likely factor in retaining Yi is to have him help oversee this restructuring.
The decision to keep Yi and finance minister Liu Kun also speaks to Xi’s continued focus on financial stability. China may be rebounding from Covid, but the challenges for the financial sector are substantial: ensuring that the recovery stays on track without overdoing stimulus; containing spillovers from the property sector to financial stability; and addressing mounting risks in local government finances and China’s regional banks.
The full picture of China’s new financial team is still coming into view. The outstanding questions are:
- Remaining financial appointments. YI Huiman, currently the head of the securities regulator, is likely to move over to the new State Administration of Financial Regulation. WU Qing, currently a vice mayor of Shanghai, seems likely to head the China Securities Regulatory Commission. Both are experienced officials. These appointments could be made in coming days but timing is unclear.
- Party secretary of the PBOC. Since 2018, Beijing has split the roles of the party secretary of PBOC (the political leader) and governor (administrative head). The current party secretary, banking regulator GUO Shuqing, is likely to step down after the NPC. Media are reporting that vice premier HE Lifeng will likely be double hatted as the PBOC party secretary. This decision is a bit less significant now that YI is staying on as governor but will become more important when he moves on.
- A new Party oversight body? Even with the shakeup of the regulatory structure, it is still possible that Beijing could announce a new Party body to oversee financial issues. If it happens, this would likely be announced shortly after the NPC.
We will have more to say about the outlook for financial and monetary policy once these holes are filled in. But for now, the macro takeaway is overall continuity, particularly the focus on financial stability issues. This reinforces a theme of disciplined stimulus and conservative growth targets seen throughout this NPC.
Farewell to “China’s Larry Summers”
I will be a little sad personally to see the retirement of vice premier Liu He, Xi’s key economic advisor and an important counterpart to US officials (a capacity in which I had some contact with him). I am not sad to see the end of references to him in US media as “China’s Larry Summers,” a holdover from the early days of the Obama administration that never adequately described Liu’s role.
Liu He was not as powerful or as much of a pure market liberal (in the Western vein) as was often assumed. But he did bring a coherent policy agenda and was willing and able to explain it – not something to take for granted in an opaque system that has only become harder to understand as Xi has centralized decision-making.
Liu was focused on China avoiding “growth traps” that would lead to a stalled economy or a financial crisis. This informed Xi’s main economic policy initiatives, often focused on the supply-side, to reduce industrial overcapacity, prevent a further rise in leverage, and (more recently) wean China off of a reliance on real estate development to drive growth. The area of structural reform where I suspect Liu would have liked to make more progress is reducing the role (or boosting the efficiency) of state-owned enterprises, which continue to act as a drag on China’s productivity and capital allocation.
The fact that Liu was close to Xi made him an important voice for explaining the purpose of these initiatives – and communicating back key concerns. At some critical times he reassured domestic and international markets at to the policy direction, sometimes through a sobriquet in the state media as an “authoritative person.” He provided political cover to reform-minded technocrats in the financial agencies. He also advocated for increased foreign investment, including an impressive pace of opening in financial services since 2017.
Finally, Liu has been a trusted and often effective counterpart to US economic officials, helping finalize the (deeply flawed) phase one trade deal in 2020. Such formal dialogues don’t exist under Biden, but Liu has maintained channels, such as with Treasury secretary Janet Yellen. It is possible that he stays involved in the bilateral relationship through an advisory or semi-official role.
All of this raises the question of what we can expect under his successor as vice premier, HE Lifeng. He spent most of his career at the local level in Fujian province, where he became close to Xi. He did a stint as a senior official in Tianjin, where he oversaw an ambitious project to create a financial district that flopped and left a lot of empty office buildings (he wasn’t alone among local officials in this proclivity, so I don’t make too much of this). Since 2014, he has led the state planning agency, the National Development and Reform Commission (NDRC). While he is a PhD economist, we know very little about He’s views about key reform issues but they likely don’t depart much from the current agenda. He is much less well-known than Liu to the international financial community.
But He may not necessarily need to fill Liu He’s exact shoes. In his first ten years in power, Xi served with a premier (Li Keqiang) whom he didn’t trust, with Liu serving as something of a shadow premier. This changes now that Xi has installed an acolyte, Li Qiang, as the new premier. Another key lieutenant, Ding Xuexiang, is the first ranked-vice premier. These officials and some others will also play key roles in formulating and implementing economic policy. It also isn’t clear if He will be the main counterpart to the US on economic issues, should that channel eventually revive.
Economic policies are unlikely to change much in Xi’s third term despite Liu’s retirement. They will focus on innovation and industrial policy (including technological self-reliance and supply chain security), avoiding systemic risks, and efforts to promote more equitable growth under the still vague Common Prosperity initiative. The big hole that Liu leaves is a unique bridging role as an official trusted by Xi but also by reformers and international counterparts. The risk is that when China goes through economic or geopolitical turbulence, a lack of visibility into policy could deepen uncertainty and amplify shocks to the rest of the world.
Xi and his new premier take the stage on Monday
The NPC concludes tomorrow (Monday). Xi is likely to give a speech, while new premier Li Qiang will hold an annual press conference.
Both of these are important for policy signals. For Xi, the main watchpoints are political – that is, the extent to which Xi focuses on a message of a reassurance to the domestic and international audience as opposed to a more muscular focus emphasizing unity and struggle. Xi’s speech to the private sector last Tuesday was more titled to the latter, indicating that Xi feels less urgency to boost confidence than many had expected (see our coverage of that speech HERE).
For Li, it will be important to hear what he has to say about economic policies. The economic targets and stimulus policies announced at the start of the NPC – by outgoing premier Li Keqiang – were on the whole quite conservative (our recap HERE). Li is likely to stress support for the private sector, foreign investment, and a robust recovery. He won’t drop new bombshells but may offer details on the policy agenda that help inform the outlook.
