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Zhou Xiaochuan after 15 years as head of the People’s Bank of China is retiring with his protégé Yi Gang taking over. Yi  is a technocrat with over 20 years  experience at the PBoC.

 PBOC Yi Gang

New PBOC Head Yi Gang

The National People’s Congress elected Yi Gang as Zhou's replacement on the weekend. The decision stays with the status quo as Yi is a strong proponent of Zhou’s management of financial risks and market reforms. One thing of note is that Yi's ability to shape policy will be more limited than that Zhou.

Zhou career began in academia and joined the PBOC in 1997 becoming deputy governor in 2007. What is unusual with his appointment is unlike his predecessors he does not have experience in industry or politics. Perhaps a sign of changing times with his approval as Yi has spent considerable time overseas, living for over a decade in the US as a student and professor.

Markets Like Continuity

His appointment is a popular one for the markets, in this era of continuity and chaos, remember the little matter of U.S. tariffs. His experience managing the operational details of monetary policy in China’s increasingly complex financial system is a calming factor. It's not all roses though Yi’ and other senior figures at the PBOC were left redfacednwhen the change to the renminbi fixing mechanism in August 2015 was interpreted so negatively by investors. Yi eventually was able to contain the damage at the emergency press conferences that ensued.

That crisis management helped him improve his communication skills and managing market expectations, (watching Bernanke would have also helped)  When the Fed last raised rates, the PBOC thoughfully gave the impression of following suit to minimize downward pressure on the renminbi. The power of perception as the actual monetary policy stance was unchanged. 

Yi said recently that liberalisation of the exchange rate and capital account should be continued. What will hamper Yi initially will be the PBOC’s lack of independence to set the direction of policy. Key reforms and changes in the PBOC’s main policy variables need approval by the State Council. It is true that the growing importance of open market operations (OMO) in determining monetary policy objectives  has allowed the PBOC more discretion. What is clear is the monetary stance and direction of financial sector reform are still dictated from the council. 

Zhou continually warning about the risks of keeping monetary policy too loose for too long but this was ignored in favour of propping up growth by the party leaders. Now the Party has more influence over the state meaning Yi will face even tighter constraints. It will take time for Yi to get anywhere near Zhou’s political muscle. 

Yi will be reporting to Liu He, Xi’s right-hand man on economic policy withLiu was appointed vice premier at the weekend also. The power balance between Zhou and Ma Kai, the outgoing vice premier responsible for the financial sector, was much more even. Of course when both the bank and the party have the same objectives to deleverage and tackle financial risks it is a mute discussion.

Xi has reasserted the supremacy of the Party over the state, this significance here is that even when Zhou with greater independence was unable to avert an unsustainable surge in debt levels, we s it will be much tougher for Yi should growth go south.

From The TradersCommunity Research Desk

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