China’s new monetary chief to follow Zhou’s reform path

In Photo: Yi Gang

China’s incoming central bank governor, Yi Gang, signaled that he’ll push to maintain the course of financial liberalization set by his predecessor Zhou Xiaochuan.

The National People’s Congress, China’s legislature, voted on Monday to approve President Xi Jinping’s choice for governor of the People’s Bank of China. Liu He, Xi’s top economic adviser, was named as a vice premier, indicating that he will take the lead role in policy-making with Yi in support.

“The main task is that we should implement prudent monetary policy, push forward the reform and opening-up of the financial sector, and maintain the stability of the entire financial sector,” Yi told reporters on Monday at the Great Hall of the People in Beijing following his appointment.

By promoting an official who has served as No. 2 to Zhou for more than a decade, China is signaling that it is seeking policy continuity at the central bank. Now set to retire, Zhou, 70, has steered the institution through the global financial crisis, overhauled monetary-policy tools and overseen the elevation of the yuan to reserve-currency status during his record 15-year term.

Speaking on Bloomberg Television last Sunday, US Treasury undersecretary for international affairs David Malpass said Yi is a “very strong technical leader with lots of skills” and that the US looks forward to a “strong dialog with the leaders that China designates.”

Yi, 60, inherits an institution that, while more influential at home and abroad than the one that Zhou took over in 2002, faces much more complex challenges. The most pressing will be pushing forward with Xi’s financial cleanup without crashing an economy that’s heading toward a debt-to-output ratio exceeding 300 percent.

Separately, Liu Kun, a former deputy finance minister, was nominated to replace Xiao Jie as chief of that body, while Commerce Minister Zhong Shan was renominated to his post.

The People’s Bank of China (PBOC) faces those tasks at a time of major institutional changes. China this month merged its bank and insurance regulators, a move that gave the central bank power to write rules for the financial sector, and likely makes it the most powerful body in the new Financial Stability and Development Committee.

Still, with Liu He as vice premier, Yi’s appointment as PBOC governor signals that the central bank will be run by a tested official while overall policy direction will be set by Xi’s top economic adviser.

What our economists say:

“Like Ben Bernanke when he took Alan Greenspan’s hot seat at the Federal Reserve, Yi has some big shoes to fill,” Tom Orlik, Bloomberg’s chief Asia economist, wrote in a note. “Also like Bernanke, Yi inherits a major problem. On Zhou’s watch, a credit bubble of epic proportions expanded. Now it’s up to Yi to manage it down.”

The succession comes amid changes atop global central banks and their shift away from years of easy money. Jerome Powell succeeded Janet Yellen as Fed chairman in February and Bank of Japan Governor Haruhiko Kuroda is set to begin another term. And though European Central Bank President Mario Draghi doesn’t conclude his time in office until late next year, jostling over his replacement has already begun.

Yi faces an immediate task of calibrating the PBOC’s response to monetary policy normalization in the United States.

Domestic concerns

“China’s monetary policy should be mainly based on domestic economy and finance situations. We need to consider it comprehensively,” Yi said at a news conference on March 9 when he was asked about whether the PBOC will follow prospective Fed rate hikes.

Yi joined the central bank in 1997 and served in a succession of roles before promotions to deputy governor and administrator of the State Administration of Foreign Exchange. As head of the currency regulator, he presided over expansion of the world’s largest foreign reserve stockpile, which peaked in 2014 at nearly $4 trillion, along with more loosening of currency trading restrictions and greater emphasis on increasing the yuan’s international use.

US education

Like Zhou, Yi is a fluent English speaker with longstanding links to global economic leaders. Yi earned a business degree at Hamline University in Saint Paul, Minnesota, and a PhD in economics at the University of Illinois before moving to Indiana University at Indianapolis as a professor in 1986, according to his official PBOC biography.

While lacking the independence afforded the leadership of most major central banks, Yi will influence decisions that help shape the global financial landscape in an economy that contributes about a third of world growth.

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