China sidelines its once venerated central bank

The influence of China’s once-powerful central bank has diminished as Beijing steps up a drive to centralise Communist party control over financial regulation.

Some of the powers formerly held by the People’s Bank of China have been taken over by a party oversight body and a revamped financial regulator as Beijing resets its growth model.

While the central bank retains a vital role in daily money markets, its governor is now ranked lower in the party hierarchy than the chiefs of some of the banks the PBoC used to regulate.

Analysts said the changes, part of a shake-up under President Xi Jinping, would diminish the PBoC’s clout over domestic policymaking as well as its role as a communication channel with global regulators and markets.

“One of the biggest casualties of the new financial architecture is the diminished status of the PBoC,” said George Magnus, an associate at Oxford university’s China Centre.

He added that “the PBoC’s reformist and modernising tendencies” had been “a sort of Trojan horse that allowed the government to experiment with financial liberalisation and . . . integrate other market-oriented mechanisms [within] a state-dominated system”.

Now, however, the central bank is being pushed to the sidelines as China contends with slow post-pandemic growth and a mounting debt crisis hitting the property sector and local governments.

“The PBoC in particular has been quite cautious about going back to the old playbook of credit-financed investment as a way to boost growth,” said a foreign academic who recently met China’s top financial regulators, including Pan Gongsheng, the new central bank governor.

While the central bank has always operated under the auspices of China’s State Council, or cabinet, its authority on financial matters was firmly established. It was seen as a hotbed of talent in China’s policymaking apparatus, its technocrats playing a key role in shaping financial regulations over the past three decades.

Reformers such as former governor Zhou Xiaochuan, who led the bank for 15 years from 2002, also built close personal connections with foreign counterparts including former US Treasury secretary Henry Paulson.

But since March Beijing has in effect put the PBoC under the control of a Communist party-led oversight body — the Central Financial Commission — which has nearly 100 staff overseeing financial affairs.

He Lifeng, the country’s vice-premier and new economic and finance tsar, heads the office of the CFC, which will have a say in top appointments at the PBoC. He reports to Li Qiang, China’s premier, the formal head of the CFC and the de facto top official responsible for China’s economy and financial affairs, according to official statements.

Beijing has also created the National Administration of Financial Regulation — a revamped version of the banking and insurance regulator — to oversee all financial activities aside from the securities industry.

The NAFR will absorb more than 1,600 county-level branches of the PBoC, according to two people briefed on the process. The central bank had 1,761 such branches at the end of 2021.

The PBoC has also been subject to a years-long anti-corruption crackdown. Fan Yifei, a former vice-governor, was removed from office last year after being investigated for corruption. Sun Guofeng, head of the central bank’s monetary policy department, has been under investigation since May 2022.

The work of overseeing new financial activities such as Ant Group’s hugely popular e-payment system Alipay and financial misconduct has since partially shifted to the NAFR. This means administrative approvals and daily supervision of groups such as Citic and Everbright fall to NAFR officials.

As part of the personnel reshuffle, Pan, an experienced central banker, was appointed PBoC governor and its party head in August, an unexpected appointment given he was about to turn 60, the unofficial retirement age for many Chinese officials.

The last-minute appointment appeared to reflect a hasty, haphazard process, surprising many people internally, according to people who worked at the PBoC.

At the lower echelons, some advisers and research department heads, including those receptive to market-oriented reforms, have either stepped down or been sidelined, four people briefed on the matter have said.

People’s Bank of China governor Pan Gongsheng
Pan Gongsheng, governor of the People’s Bank of China, is outranked in the Communist party hierarchy by heads of some of the banks his agency supervises © Susana Vera/Reuters

Miao Yanliang, former chief economist at the trading arm of the State Administration of Foreign Exchange, China’s foreign exchange regulator under the PBoC, joined CICC, the country’s top securities brokerage, in March. The department he used to lead, which regularly delivered policy proposals to then vice-premier Liu He, now faces reform.

The chairs of some state banks, such as Liao Lin at Industrial and Commercial Bank of China, Gu Shu from Agricultural Bank of China and Cai Xiliang from China Life Insurance, now also outrank Pan in the Communist party hierarchy. These bankers are all members of the party’s central committee, while Pan, despite being a de facto supervisor of such lenders’ daily operations, is not.

Given the importance of hierarchy in the Chinese system, this puts Pan in a less influential position over the long-term planning of China’s financial affairs. The PBoC and Safe did not immediately respond to requests for comments.

Analysts said the PBoC may now merely implement policy rather than shape it.

The foreign academic who recently met Pan said that, while China’s central bankers are “well aware” of the country’s economic challenges, they believe there is not much more room for monetary stimulus because of a debt overhang and the weakness of the renminbi.

Nor has the PBoC been keen on policies such as targeted refinancing tools to support small businesses and the completion of unfinished homes. Many officials and analysts have said that these are quasi-fiscal and temporary measures that should be rolled out by the finance ministry rather than the central bank.

But, under pressure from the State Council to improve economic sentiment, the central bank is now using such tools more. Pan said in a speech in Hong Kong last month that the bank would boost their use. Such targeted credit support measures accounted for 15 per cent of the PBoC’s balance sheet by the end of September.

In its effort to boost growth, Beijing emphasises such fiscal incentives as a primary means of managing the economy, with interest rates as a supporting measure.

But some analysts warn of the risks of neglecting fundamental economic problems and marginalising the central bank.

“Monetary tools may be able to stymie pressures in the short- to medium-term, but it’s not enough to address hard questions in the long term like diminishing returns to investment, a shrinking labour force and a spotty social welfare system,” said John Yasuda, assistant professor of political science at Johns Hopkins University. 

The PBoC has argued against using balance-sheet expansion to roll over the enormous amount of debt that comes due every day, said Victor Shih, director of the 21st Century China Center at the University of California, San Diego. “With more direct supervision [from the party], perhaps its ability to resist quantitative easing will be diminished,” he added.

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