20 April 2018, 14:05 GMT
On 19 March, China’s National People’s Congress (NPC) announced the next governor of the People’s Bank of China (PBOC). While the long-anticipated nomination was seen by some as a two-horse race between Jiang Chaoliang and Liu He, another policymaker, Yi Gang, ended up getting the post.
Yi Gang was the first governor to have had an overseas education in the central bank system. He has a solid academic background and has written important textbooks on monetary policy which are widely used by Chinese universities. Overall, Yi is a broadly respected technocrat both within and outside the PBOC, and will likely become a stabilising factor for the PBOC’s policy and ensure its continuity - having served as its deputy governor for 11 years.
Yi’s nomination also has interesting implications amid the recent power reshuffle. The central government has decided to merge the China Bank Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC). The resulting single commission will oversee both banking and insurance, under the direct control of the State Council. This restructuring essentially gives the PBOC a greater role in financial regulatory policy-making, showing the importance placed on financial stability in China. Given the PBOC’s increasingly global interactions, Yi’s fluent English could also help it better communicate China’s policies to an international audience. His appointment highlights the growing influence of China’s reform-minded policymakers who increasingly occupy senior economic positions, and reflects a genuine focus on the quality of growth rather than the absolute level.
Over the past few years, the PBOC has developed a ‘dual-pillar’ policy framework, with monetary policy targeting price stability and economic growth, while macro-prudential policies address asset prices and financial stability. In other words, the PBOC does not have to tighten monetary policy and financial regulation at the same time. It currently leans towards tightening monetary policy. The implications of the central bank’s current policies are now being felt, with tighter lending conditions moderating bank behaviour and borrowing demand, despite overall economic sentiment remaining resilient.
Survey measures, seasonally adjusted by Fidelity. Levels above 50 indicate economic expansion. Source: People's Bank of China, Haver Analytics, Fidelity International, March 2018.
However, the PBOC will continue to take a cautious approach. 2018 is a politically important year — the first year of President Xi’s second term, the fortieth anniversary of the opening-up of China, and the halfway point of the thirteenth Five Year Plan. The PBOC will want to support the government’s approach of balancing economic stability and structural reform. As Xi’s core team gradually tightens its grip on power, there is and will be a growing coordination and consistency of economic policy. Consequently, while some might argue there are few signs China is heading for a hard-landing scenario, the PBOC may operate on a counter-cyclical basis if we do see a notable slowdown in 2018, loosening its policy stance and shifting back to monetary easing and fiscal stimulus.
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