MNI SOURCES: Yi-Led PBOC May Further Liberalize The Yuan

- Yuan's Liberalization May Accelerate Under Newly-Appointed PBOC Governor 

- PBOC Under Yi May Keep MonPol Neutral and Liquidity Stable

- No Details on FSDC, Which May Supersede Yi's PBOC  

     BEIJING (MNI) - Yi Gang, the newly-appointed governor of the People's Bank

of China, will likely push for market-based currency reform to help tackling the

structural issues in China's financial system, multiple sources close to the

central bank told MNI. 

     Yi has served as head of the PBOC's monetary policy division, assistant

governor and deputy governor. The stand-out section of his resume is his

seven-year stint as the director of State Administration of Foreign Exchange,

the critical arm of the central bank regulating capital flows.

     During Yi's 21-year service with the PBOC, he participated in drafting many

major macro policies, including reforms over the exchange rate and interest

rates. His crowning moment came when the yuan was included in the special

drawing rights (SDR) of the International Monetary Fund, effective October 2016.

     "He was a close ally of then-Governor Zhou Xiaochuan, which makes him a

perfect successor," an official at the PBOC told MNI. Yi's extended experience

in managing forex will allow him to make further progress over the yuan's

expansion into international markets, the official said. 

     --CAPABLE AND SAVVY

     Yi, who received his PhD in Economics from the University of Illinois,

stands out as a capable and savvy financial manager credited with helping China

maintain a relatively stable monetary and currency environment. He may lead a

more powerful expansion of Chinese capital than under his more cautious

predecessor, the source said.

     The marketization of the yuan has regressed since 2016, when the PBOC

tightened capital controls as the currency plunged against the dollar. That

raised a dangerous prospect of capital flight. Many commentators saw the loss of

reform momentum as a major setback for Zhou, who had advocated for deep reforms

to unshackle the currency.

     Sources said the yuan will then be kept at a relatively strong position,

and China will advance policies to make international markets more willing to

trade the currency. "We would see some preferential policies to encourage the

yuan usage in the One Belt, One Road initiative this year," one of MNI's PBOC

sources said. 

     --FINANCIAL MARKETS OPENING-UP

     China's much-touted opening-up of financial sectors will likely demand a

freer yuan, the source said. 

     At the end of 2017, Yi said in a forum that reforming the yuan formation

mechanism and reducing capital controls were crucial to the economy opening to

the outside world. 

     "Capital controls must be relaxed to facilitate trade and investment," Yi

said. Allowing a more market-based system to set the yuan's exchange rates plays

a role in stabilizing the financial sector and international payment system, Yi

said at the time.

     But he also stressed the currency's reform should match other factors of

the economy and not be pursued rashly. That indicates capital controls are

likely to remain in place for some time, MNI sources said. 

     --NEUTRAL AND STABLE

     Zhou's 15-year rule has also left Yi some thorny and urgent tasks. The

current campaign of rooting out financial risks may also hobble growth.

     Governor Yi may likely maintain a neutral monetary policy stance and thus

essentially stable liquidity condition, Zhao Yang, the chief economist with

Nomura, told MNI. 

     He is also likely to push the "macro-prudential policy framework" and

explore ways to include shadow banking and internet financing in the central

bank's macro prudential assessment. "That suggests financial deleveraging will

be ongoing for years to come," Zhao said.

     However, as the newly-formed and powerful Financial Stability and

Development Commission (FSDC) remains shrouded in secrecy, it isn't clear if Yi

can get his financial reforms pushed through.

     "The FSDC will be the top authority," MNI's source said. How much power the

PBOC will be granted needs clarification, the source said. 

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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