China appoints Yi Gang as new central bank chief

Frederick Owens
March 20, 2018

The National People's Congress also on Monday announced the appointment of Liu Kun as finance minister.

Parliament approved the nomination of Xi's influential adviser Liu He, a Harvard-educated Communist Party official who as vice premier is expected to oversee the financial and economic sectors.

By promoting an official who has served as No. 2 to incumbent governor Zhou Xiaochuan for more than a decade, China is signalling that it is seeking policy continuity at the central bank.

Whether or not Yi becomes the next ' Mr RMB ' (as Zhou is often dubbed), he needs to be the "Dr Reformer" at this critical stage of both the Chinese and global economy.

Relations with the USA are also among the first challenges Yi and Liu are likely to face. 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%.

Equally, if not more important, the financial reforms must be taken to facilitate China's grand economic transition.

Chinese President Xi Jinping reshaped his core economic team on March 19, promoting two trusted, US -educated lieutenants to key positions at a time of escalating trade tensions with Washington and concerns over a growing debt mountain. Jerome Powell succeeded Janet Yellen as Fed chair in February and Bank of Japan governor Haruhiko Kuroda is set to begin another term.

"His new title [of vice-premier] will give him greater authority [and] a bigger stage on which to display his understanding of the Chinese economy", which is now grappling with a huge debt problem, industrial overcapacity and a glut of property.

China's central bank - like the US Federal Reserve - plays a key role in the smooth running of the country's economy. "We need to consider it comprehensively", Yi said at a press conference on March 9 when he was asked about whether the PBOC will follow prospective Fed rate hikes.

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While at the PBOC, Yi has called for greater market access for foreign investors and further internationalization of China's currency.

Like Zhou, Yi is a fluent English speaker with longstanding links to global economic leaders.

An economic reformer, Yi studied in the US, earning a PhD in economics from the University of IL and then a tenured faculty position at Indiana University, before returning to China to take a position at Peking University.

He'll need to keep an eye on inflation that's forecast to accelerate this year and guard against the risk of a resurgence of destabilizing capital outflows.

China also faces a big build-up in local-government and corporate debt that many fear could destabilize the economy.

The economy proved surprisingly strong last year, posting the first full-year acceleration in growth since 2010.

In an article written about the 2008 global financial crisis and the Great Depression of the 1920s, Liu He said that there were warning signs before a major crisis, including a long period of economic exuberance, the advancement of new technologies, lax government regulation, a widening income gap, monetary policy easing and a mania among the public to "get rich quick".

The People's Bank is widely seen as an advocate of conventional, market-oriented economics. In particular, China's total debt has nearly doubled between 2008 and mid-2017, to 256% of GDP as the economy slowed down from double-digit growth to a mere 6%.

At a tricky time, Yi's appointment represents stability, Hung Tran, executive managing director at the International Institute of Finance, said in an interview in Buenos Aires. Last year Beijing said it would permit companies to own majority stakes in financial firms within three years. Yi "has a very good understanding of the issues and has a forthright approach, and has an open mind discussing issues".

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