Free Article (Insights Vol.4, No.7)

Since the 20th Party Congress (October 2022), there have been increasingly frequent speculations about an upcoming reshuffling at the head of the People’s Bank of China (PBoC). The following Two Sessions 两会 – held in March 2023 – saw the establishment of the two new Party-led financial committees: the Central Financial Commission 中央金融委 员会 and the Central Financial Work Commission 中央金融工作委员会. The Two Sessions also led to extensive ministerial changes. However, some key positions, such the governor of the PBoC, were left untouched. Yi Gang 易纲– the current PBoC governor – was allowed to keep his position despite his advanced age. Right after the Two Sessions, we posited that Beijing had likely decided to keep Yi Gang to smoothen the transition to the new State Council led by Li Qiang and to reassure foreign investors.

After more than three months after the ministerial reshuffling, the long awaited change was finally announced by the Central Organization Department: Guo Shuqing 郭树清 – a key reformer and regulator tied to the legacy of Zhu Rongji 朱镕基 – was removed from his position as Party secretary of the PBoC and replaced by Pan Gongsheng 潘功胜, a professional banking cadre who led the influential State Administration of Foreign Exchange 国家外汇管理局[1]. Of course, this is but the first step towards the complete reshuffling as a new PBoC governor is still expected to be appointed sooner rather than later. Realistically, Pan is now the front runner to replace Yi. But can Pan replace Yi Gang and as such hold both the Party secretary and governor position at once? The possibility of such an appointment raises several underlying issues tied to the overall status of the Central Bank within the Party-State apparatus.

Under Pan’s leadership?

A native of Anqing, Anhui Province, Pan has a doctorate from the Renmin University of China, and has conducted research at both Cambridge and Harvard university. He has worked in major State-owned banks for more than two decades, and joined the PBoC in 2012 as vice governor. Three years later, in 2015, Pan also became the director of the State Administration of Foreign Exchange. Between 2015 and his current appointment, Pan also headed the Internet Financial Risk Rectification Leading Group 互联网金融风险整治领导小组, whose tasks include cracking down on the use of cryptocurrencies and regulating fintech companies in China.

A deeper issue

We previously mentioned that Pan, a close associate of former PBoC Governor Zhou Xiaochuan, was being considered as one of several suitable candidates to replace Yi Gang. The main issue keeping Pan from being seen as a serious candidate lies in his current status within the Party: Pan, like several of his PBoC colleagues, is a double-no / shuangfei 双非[2]; he is not an alternate nor a full member of the Central Committee.

Although some may not find this particularly significant, the diminished status of the current Party secretary of the PBoC – considering that Pan’s three predecessors were all members of the Central Committee while holding the same position – indicates a new reality for the banking sector at large. It signals the PBoC’s gradual loss of independence under Xi Jinping, as well as a reduction in the influence of cadres leading the Central Bank since Zhou Xiaochuan’s departure.

To be fair, Yi Gang has not yet been asked to step down. But since he will turn 66 next March, the imperative is growing to find his replacement. As we noted before, more pragmatic observers are sure to expect cadres like Yi Huiman 易会满, Han Wenxiu 韩文秀 – deputy director and responsible for the daily work of the working unit of the Central Financial and Economic Affairs Commission and a member of the Central Committee – or Zhu Hexin 朱鹤新[3]to come in and “save the day”. But in our view, a key consideration is missing to fully assess the “new role” of the PBoC for the Chinese economy: considering the growing influence of Xi within the banking/financial sector, the fundamental quality required for this next appointment will be loyalty[4].

Truth be told, looking at how things are currently evolving, it would not surprise us to hear that Pan Gongsheng has already been pre-approved to replace Yi Gang in the near future. The Party leadership might have decided to favor Pan over Zhu Hexin or Han Wenxiu because in the view of foreign observers, Pan has an “international background” and can deal with Western officials – something local “traditional” cadres following Xi are not competent at[5].

This does not mean that Zhu Hexin, Hen Wenxiu or Yi Huiman is more competent than Pan Gongsheng, or vice-versa. In fact, the Party having tightened its grip on the economy, the once highly sought after job of PBoC governor might now just be an empty position. Those suggesting that Pan’s appointment as both Party secretary and governor of the PBoC would grant him more power than his predecessor are sorely mistaken. Pan will have to contend with He Lifeng[6], Ding Xuexiang and Li Qiang, who are all trying to control the economy; Pan’s main role may simply be navigating office politics. He might thus face even more roadblocks than his predecessors[7].

The reality of the Chinese economy

Ultimately, whoever is selected to replace Yi Gang will need to address critical systemic issues such as the continued depreciation of the renminbi[8], the steady decline of the real estate sector[9], local debt issuance[10], the need to unwind covid-era and post-covid fiscal and monetary policies[11], and the high-level of youth unemployment[12]. And because of the aforementioned intra-Party competition over the economy, whoever heads the PBoC will need to take a back seat role in economic decision-making[13]. We expect the new head of the PBoC to play a leading role of “technical advisor” to Xi’s associates. But then again, considering the overall international economic environment and China’s domestic predicament[14], we are not sure if much can be done – by whoever becomes the next governor of the PBoC – to revive the Chinese economy[15].

Notes:

[1] Leading that administration looks like a rite of passage to lead the PBoC as both Yi Gang and Zhou Xiaochuan headed the administration just a few years before leading the PBoC.

[2] We also need to point out that Pan was an alternate member of the 19th Central Committee. This makes his current shuangfei status even more problematic and embarrassing. In our view, considering his recent appointment, the fact that he failed to enter the Central Committee during the 20th Party Congress cannot be a simple accident.

[3] An alternate member of the 20th Central Committee, Zhu is Party secretary of financial services conglomerate CITIC Group 中信集团. Often forgotten, Zhu is a close associate of Ding Xuexiang 丁薛祥 and therefore, is a strong contender to replace Yi Gang.

[4] We feel that the fact that Party leadership failed to arrange Zhu Hexin to take over Yi Gang as of yet might be a sign that his candidacy is too contentious – between Liu He 刘鹤, He Lifeng 何立峰, Li Qiang 李强 and Ding Xuexiang – to be approved by Xi.

[5] We must not forget that Pan, who is fluent in English, does have an international perspective and has had smooth dealings with overseas investors in the past.

[6] We still feel He Lifeng will be the one to lead key financial institutions, thus effectively “managing” the PBoC.

[7] Even if the Party abolished the “dual-head system” 双首长制, because of his weak position as shuangfei, Pan’s overall influence over the economic decision-making process is likely to be negligible at best.

[8] In late June, the PBoC pledged to stabilize the CNY exchange rate, which currently sits at its lowest point in 15 years.

[9] Party authorities have repeatedly restricted price cuts in the property market, yet housing prices are still plummeting in certain regions. Local governments have also begun helping developers cut prices in disguise to avoid the construction sector coming to a halt.

[10] Sooner or later, local loans will become non-performing and the ensuing burden will have to be shouldered by State-owned banks.

[11] The policies that helped keep the economy and companies afloat will inevitably come to an end as the Stat cannot simply keep this accommodating environment forever.

[12] Traditional manufacturing jobs are less available and less appealing to the younger generation, who now finds it increasingly hard to find a decent job in first- and second-tier cities.

[13] In this regard, the PBoC, directly under the tutelage of the Central Financial Committee and the Central Financial Work Committee, is likely to play the role of an implementer for the foreseeable future; financial risk assessment and financial stability will be managed by the two new Party committees.

[14] From the US’ perspective, as expressed by the current US treasury secretary, the promotion of Pan is seen as positive and helpful for the dialogue between the Chinese and US financial teams.

[15] As previously mentioned, the idea of putting someone on display, like Pan – a unanimously recognized figure in the banking sector – as the head of the PBoC might be an attempt at reassuring the markets or showing the outside world that China’s financial market will continue to open, despite numerous signs signaling the opposite.