China’s jockeying of officials puts spotlight on central bank

by: FT Confidential Research

• The apparent return of Guo Shuqing to Beijing from the provinces again stirs the question of who will succeed Zhou Xiaochuan as governor of the People’s Bank of China.
• Zhou’s eventual retirement is a given and when it comes markets may be unnerved. If Guo is named to take over, investors should not worry: he is a Zhou protégé, a known reformist and would be a strong candidate to lead the bank.
• That said, Zhou’s 15 years are a demonstration of the institutional constraints of the central bank governorship. His replacement will have no easy task: China’s financial system continues to generate debt with impunity, investors are running for the exits and the Trump administration promises to get tough on trade.

Reports that Guo Shuqing has left the governorship of Shandong province to become head of the China Banking Regulatory Commission (CBRC) again stir talk about succession at the People’s Bank of China (PBoC).

Mr Guo, who has been governor of Shandong province since 2013, was a deputy of PBoC governor Zhou Xiaochuan early in the last decade. The CBRC was spun out of the central bank in 2003; Mr Guo’s appointment would put him one step away from succeeding his former boss at the PBoC in a government reshuffle to take place this year.

Shang Fulin, the CBRC’s current head, has reached retirement age, having previously served at the central bank and as director of the China Securities Regulatory Commission (CSRC), the stock market watchdog.

Although Mr Guo has long been seen as the obvious replacement for Mr Zhou, nothing is obvious about Chinese government horse-trading and there is no certainty that he will make the move back to the PBoC. He has previously denied that he is in the running. 

End of an era?

But Mr Zhou’s eventual retirement is a certainty. He is nearing 70 — well past the age at which Chinese officials usually retire — having headed the central bank since 2002. Since then, he has steered the monetary authority through China’s post-WTO accession boom, when the PBoC struggled to cope with hundreds of billions of dollars in capital inflows, and through the current growth slowdown, with its associated outflows.

Mr Zhou has drawn criticism from within the government but received the imprimatur of the current leadership when he was appointed to an unprecedented third term in 2012. He is well respected by the global financial community as a knowledgeable and important voice in the domestic reform debates. For that reason, a retirement announcement could unnerve markets. Finance minister Lou Jiwei was suddenly replaced in November in a surprise move that some believe was a blow for reform progress in China.

We would be cautious about applying the Great Man theory here. Certainly the history of Chinese economic reform has been about the determination of leaders such as Deng Xiaoping, Zhu Rongji and, perhaps, Xi Jinping.

But Zhou’s influence as head of the PBoC is less clear. Yes, the government made the most progress in financial liberalisation since the current party leadership agreed its reform blueprint in November 2013. Reforms include putting the banks on a more commercial footing, opening up the domestic markets to foreign investors and deregulating interest rates.

However, China’s debt problems (see chart), its struggles to manage the exchange rate and the moral hazard that continues to allow the misallocation of financial resources all speak to the central bank’s lack of independence and the limits of Mr Zhou’s ability to influence the bureaucracy.

This does not mean that the 60-year-old Mr Guo would not be a boon for Chinese monetary policymaking. He is a fluent English-speaker with solid reformist credentials and has extensive experience in the internal debates about economic liberalisation.

In the hot seat

Mr Guo will have plenty to do at the CBRC. Although it reported that the non-performing loan ratio of commercial banks was just 1.74 per cent at the end of 2016, this reflects the system’s reluctance to recognise bad debt, in collusion with the authorities. The government has stated its determination to push financial system deleveraging and the PBoC has been nudging interest rates higher in recent months to encourage this process without causing widespread failures.

Were Mr Guo eventually appointed to run the PBoC, his tasks would include managing an exchange rate that is now under pressure to depreciate (see chart). He would also have to deal with a US government that says it is determined to take China to task over its trade policies, including the currency.

Finally, he would also be charged with tackling China’s debt machine. Reports this week that the government may be taking a cross-regulatory approach to policing wealth management products lends credence to talk about the establishment of a super-regulatory authority, capable of co-ordinating regulation across an increasingly tangled financial system.

This could involve the creation of an entirely new body, although the PBoC could simply be given back powers that were devolved through the establishment of securities, insurance and banking watchdogs since the early 1990s. Before his stint in Shandong, Mr Guo also served as director of the CSRC. A short stay at the CBRC could prepare him for a big next step.