MNI: New PBOC Party Chief To Push Prudent Policy, Fx Reform

The newly appointed Party Secretary of the People’s Bank of China will insist on prudent policy, highlight flexibility of the yuan exchange rate and enhance Communist Party oversight of the financial sector, policy advisors told MNI.

Chinese authorities recently appointed Pan Gongsheng, vice-governor at the PBOC, Party Secretary – the top party post at the Bank. Pan joined the PBOC in 2012 and remains a likely candidate to replace Governor Yi Gang, who has led the Bank since 2018. Pan has worked in the financial sector for 30 years and has also led the State Administration of Foreign Exchange.

An anonymous advisor told MNI the Cambridge- and Harvard-educated economist was appropriate for the position. “His appointment benefits both regulation and reform,” the advisor said. The appointment will send a signal of policy continuity to markets when financial stability faces challenges, the advisor added.

However, Pan does not sit on the Central Committee of the Chinese Communist Party – the country’s highest decision-making authority – unlike his predecessors, raising concern his appointment could diminish the PBOC’s voice in policymaking circles. His lower rank within the Party could also constrain his independence when making policy decisions, the advisor said.

As Party Chief, Pan will focus on enhancing the Government's control over the financial sector as authorities aim to overhaul it, ensuring the sector serves the demand of the real economy and the people, rather than random expansion based on speculation, the advisor noted.

FLEXIBLE YUAN

Pan has a reputation as a reformer and “technical official,” leading the Agriculture Bank of China’s 2010 A-share listing. He has also worked across several PBOC departments, including the core financial market team which monitors interbank bonds and derivatives.

A former PBOC official told MNI Pan can deal with financial risks and has worked closely with Yi to push the yuan’s internationalisation and increase CNY’s flexibility as SAFE’s director, improving regulation of the fx market and stabilising China’s foreign exchange reserves. The introduction of risk-reserve ratios for fx forwards and management tools for cross-border company funding, which helped form a cross-border macro prudent management system and allowed the central bank to curb overly excessive yuan moves, the official said.

Pointing to recent CNY weakness and the PBOC’s unexpected tolerance, the official predicted the Bank would strengthen flexibility of the yuan and highlight a “two-way” swing. Pan often warned the market when CNY came under pressure. The official said the PBOC could take actions if the yuan slides further, considering the Bank flagged the prevention of “any big CNY volatility” at last week’s monetary policy committee meeting (see: MNI: PBOC To Act If Yuan Falls Fast - Trader, Advisor).

CHALLENGES

The international financial community knows Pan well, particularly following his involvement in the introduction of the Hong Kong Connect programme, which will help China reconnect with global markets as the country reopens from Covid. However, Pan will need to balance multiple tasks, such as shoring up the economy, preventing financial risks and pushing reforms amid a more complicated external situation (see:MNI INTERVIEW: China Stimulus To Boost Economy In H2).

The PBOC also faces challenges as China’s economy slows due to a lack of new growth drivers, while extra monetary stimulus could deteriorate fiscal monetisation, according to another advisor. The PBOC and US Federal Reserve’s divergent monetary policies will also create challenges, he added. However, the Bank will likely not implement large-scale easing under Pan, as the money supply accelerates and the continuation of a flexible stance will depend on the economic recovery, the advisor argued.

In June, Pan stressed the importance of independent monetary policy and targeted balance between domestic and external issues, attributing the “comparatively stable financial cycle in China” to a prudent monetary stance. “The ample and appropriate liquidity has provided an abundant and stable funding to the real economy,” he noted.