People’s Bank of China’s new head faces recovery test

China’s new central bank head Pan Gongsheng is set to take the helm at a critical moment for the world’s second-largest economy, as it fights to reset a post-Covid recovery that looks increasingly unsteady despite relinquishing some of its powers in a regulatory shake-up.

Not only has the PBoC’s authority been weakened, with some supervisory functions hived off to another regulator, but China’s economy is suffering from weak investor confidence that many experts believe cannot easily be remedied by monetary policy. 

Analysts said the technocrat’s appointment this weekend as the PBoC’s powerful Communist party chief — he is expected to soon also be given the more public additional role of governor — was nevertheless welcomed by market participants because of his extensive experience in the sector and western contacts and training.

“The consensus seems to be that Pan is the path of least resistance, as he represents policy continuity,” said Carlos Casanova, senior Asia economist at Union Bancaire Privée.

Pan takes over from Guo Shuqing, the PBoC’s former party chief who also served as head of the country’s banking regulator, and is set to replace Yi Gang, the outgoing governor who has held the role for more than five years.

Both are respected technocrats who were expected to be replaced in March when Xi Jinping embarked on an unprecedented third five-year term as president, but were retained in an apparent move to shepherd through financial sector regulation. 

One immediate challenge for Pan is a mounting debate over the timing and scale of monetary policy stimulus to boost China’s flagging recovery, with a range of indicators from manufacturing activity to exports losing steam in the second quarter.

Despite minor interest rate cuts, Beijing has been reluctant to follow the example of central banks in developed countries by sharply easing monetary policy.

Analysts cautioned that despite Pan’s international training, his appointment would not signal a radical shift in monetary policy. Publicly, Pan has defended the central bank’s current stance to “keep a normal monetary policy” and “not make dramatic changes to interest rates”.

Aggressive monetary stimulus might not even necessarily spark a much-sought-after revival in demand, said Arup Raha, chief Asia-Pacific economist at Oxford Economics. He said Beijing’s strategy was to target credit to certain areas and reduce interest rates to soften the blow for some creditors until the global economy picked up.

“It’s more of a cushioning exercise going on now,” he said. “They are in a situation where you could cut interest rates as much as you want but the demand has gone and it’s not certain that it will turn the economy around.”

The PBoC’s policy limitations are due to more than just economic issues — changes in China’s financial regulatory landscape have also stripped the bank of some of its former powers, experts said. 

Under reforms in March to China’s financial regulatory structure, the government reduced the PBoC’s responsibilities to focus on the traditional functions of a central bank: monetary policy, financial stability and foreign exchange.

Under Guo and Yi, the PBoC had expanded its mandate to include digital payments and cryptocurrencies and other forms of credit such as property financing. 

The Chinese Communist party has always exerted close control over the country’s government institutions. The same officials often occupy senior roles for both the party and parallel government bureaucracy. 

But the PBoC’s policymaking ability will be further constrained by Xi’s efforts to consolidate the party’s direct oversight over the financial sector, establishing a new Central Financial Commission.

The CFC, an overarching Communist party body headed by vice-premier He Lifeng and veteran state banker Wang Jiang, will supervise all financial watchdogs, giving institutions such as the PBoC less sway in formulating policy.

People who interact with Yi Gang said that in the past, he and his immediate boss in government, former vice-premier and economic chief Liu He, made most of the important decisions on monetary policy.

Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said that now, however, China’s financial and market regulatory landscape was at an “impasse” as the party leadership was increasingly taking control from state institutions. 

“It doesn’t really matter who leads the PBoC,” said Herrero. “It is the party running the show.

“Whether it is Pan Gongsheng or another, he will do what is expected of him. The fact that we have not had any stimulus yet, despite the poor data, shows that nobody wants to take risks.” 

Those who have met Pan, who has held research positions at Cambridge and Harvard universities and undertook training at UK-headquartered Standard Chartered Bank, said his focus was more on “operations”, such as managing international reserves and exchange rates, while Yi was more experienced in macroeconomic issues and monetary policy.

Still, the appointment of a pragmatic official with wide-ranging experience in financial regulation has helped reassure markets rattled by China’s lagging recovery. 

“[Pan’s] experience will be instrumental in steering the PBoC through the next leg of stimulus and should be supportive of the yuan [exchange] rate in the medium term, although we can’t exclude the possibility of additional depreciatory pressures in the short term,” said UBP’s Casanova. The renminbi has been under pressure this year against the dollar as the US has raised interest rates. 

Casanova forecast more support measures by July, including indirect mechanisms such as cuts to the reserve requirement ratio — the amount of cash banks must set aside — and balance sheet expansion, meaning more central government funding to support sectors in distress.

“Pan appears to be a firm believer in the idea of gradual and targeted opening,” said Chen Long, co-founder of Beijing-based consultancy Plenum.

“Nobody would think his appointment heralds a sudden opening of China’s capital market, but the good news is, under Pan’s leadership, the PBoC is unlikely to take steps backward.”

Source: Economy - ft.com