NIKKEI ASIAN REVIEW
China’s new central bank chief will face over-flowing agenda
February 5, 2018
With China’s widely respected central bank head retiring at any moment, Beijing is increasingly abuzz over who will replace Zhou Xiaochuan: a fellow-minded progressive to modernize the economy or a Communist Party lackey?
Zhou, China’s most important change agent of the past 15 years, borders on irreplaceable at the People’s Bank of China thanks to his visionary leadership and gravitas to speak truth to power. The good news is that the spotlight is on Guo Shuqing, a crusader in the Zhou mold at the China Banking Regulatory Commission. Naming Guo would signal that President Xi Jinping is intent on continuing Zhou’s effort to clean up the banking system, root out financial excesses and keep Asia’s biggest economy on the reform path.
Yet Guo would face a uniquely frenetic year of challenges and crisis points. Here are three the next PBOC leader will confront right out of the gate.
One, the Donald Trump Show. Until recently, U.S. President Trump’s White House was a boon for China’s economy and soft power. Scrapping the Trans-Pacific Partnership, Paris climate accord and Iran nuclear deal cast Xi’s government in a stable and collaborative light. America’s inward turn since January 2017 gave Xi’s Belt and Road Initiative and his Asian Infrastructure Investment Bank more of a free rein around the globe.
The Trump effect is now turning on Beijing, putting the PBOC on the frontlines. The first blow came Jan. 22, when the White House slapped 30% tariffs on imported solar panel and washing machines. The second on Jan. 24, when Treasury Secretary Steven Mnuchin effectively declared the death of the 23-year-old strong-dollar policy. The PBOC spent the last year defending the yuan. Now it faces a runaway currency that rose 3.1% in January, its biggest monthly rally since 1980.
The surge is fueling unease among exporters and Xi’s inner circle, which counts on healthy overseas shipments to maintain gross domestic product growth at around 6.5%. That presents the PBOC with a dicey balancing act. Do nothing and speculative fund flows pour in from overseas. Capping the yuan, though, would require intervention in markets, a step that might draw currency-manipulation charges from Trump — or outright retaliation via new tariffs. Cutting interest rates, meanwhile, is not an option, as it might lead to a fresh burst of dangerous domestic credit growth. Few envy the PBOC’s dilemma.
Two, taming the “gray rhinos.” The reference here is to highly obvious, high-impact threats that can abruptly run away from regulators. Topping the list are debt-fueled globally acquisitive conglomerates including Anbang Insurance Group, Dalian Wanda Group, Fosun Group, HNA Group and Zhejiang Luosen Neili. Under pressure from Beijing, these groups are now frantically selling off foreign assets to reduce borrowings. The authorities must decide which, if any, must go and which are too big to fail. This challenge is among the reasons Guo, 61, would be a solid Zhou successor.
Stints as securities regulator, chairman of China Construction Bank, director of the state office that oversees Beijing’s $3.1 trillion of currency reserves, governor of Shandong province and now CBRC chairman afford Guo uniquely intimate knowledge of the interplay between government, markets, the private sector and the myriad gray zones in between.
Guo would bring to the PBOC his ambitious attack on banking-industry malpractice and zeal for changing lending policies and curbing cross-holdings of financial products. An increasing focus, Guo told People’s Daily last month, is on how the “hidden dangers of ‘gray rhinos’ and ‘black swans’ threaten China’s financial stability.”
A rising yuan would increase the international purchasing power of mainland tycoons. At the PBOC, Guo would have greater scope and profile to police the financing behind these debt-fueled transactions. Last month, Dalian Wanda and HNA gave the world a look at what the great Chinese fire sale looks like, hastily selling assets to cover debts and stave off liquidity crises. Beijing is trying to broker the sale of a stake in Anbang, where founder Wu Xiaohui has been in official detention for months, and regulators have taken control. Guo helming the PBOC would intensify the much-needed purge, sending waves of panic through the ranks of acquisitive billionaires and shadow-banking institutions alike.
Three, managing the great rebalancing. The biggest question this year is how boldly Xi’s team will act to wean China off excessive credit and investment and champion the role of services in the manufacturing-strong economy. Any credible transition will curb state-owned enterprises, lowering gross domestic product. Those excesses are behind bubbles in credit, debt, property and pollution. Addressing any one imbalance in isolation is challenge enough, never mind four intermingled weaknesses of a financial system that is one part hyper-controlled, one part free-for-all.
Trump is a wildcard, of course. Any radical trade actions or currency war might reduce the party’s confidence to make major structural changes. That also would force the PBOC to focus more on short-term crisis management than longer-term liberalization moves.
But Zhou wisely took steps to ensure continuity once he vacates his PBOC office. He pushed, for example, to get the yuan added to the International Monetary Fund’s special drawing-rights program. It leaves Beijing no choice but to open and strengthen the financial system, reduce opacity and loosen the capital account. Zhou worked to pull more foreign capital into the domestic bond market, which lured just $55 billion in 2017. Greater foreign involvement, it is hoped, will increase pressure to improve credit quality, boost transparency and create a discernable gap between strong and weak borrowers.
It is also about diversification. At CBRC, Guo has led the crackdown on risks in the $38 trillion banking industry and worked to choke off the flow of cash on into overheated sectors like real estate. Expect a Guo PBOC to accelerate bond-market development both as a means of financing growth and reducing excessive speculation.
An added challenge: avoiding new asset bubbles, while keeping China plugged into the major financial innovations of the day. Bitcoin is an obvious example. So far, the PBOC has argued it has full control over cryptocurrencies, even though the plethora of Chinese cryptocurrency miners suggests otherwise. Political imperatives dominate, of course. Party leaders worry blockchain mediums will help tycoons spirit untold billions of dollars out of China. Beijing is even contemplating minting its own state-backed digital currency, another controversy that will fall to Zhou’s successor.
The flurry of potential hazards zooming Beijing’s way may make 2018 feel more like a decade at PBOC headquarters. That is why it is heartening to see Xi prioritizing continued reform in choosing China’s next central banker. Though Zhou is a tough act to follow, Guo seems up to the job.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.