In Xi’s China Even the Central Bank Has a Party Boss at the Helm

For international investors trying to gauge China’s monetary policy, life is set to get even more complex.

Guo Shuqing, a high-profile banking regulator and ally of President Xi Jinping in cleaning up the financial system, is said to have been appointed as Communist Party secretary of the People’s Bank of China, the New York Times reported Sunday. The move hasn’t been officially announced, but if confirmed it would place Guo above newly anointed governor Yi Gang in the pecking order and usher in a management structure with few global equivalents.

That means to discern policy in the world’s second largest economy, there’s not just one official to watch, but at least three: Vice Premier Liu He, who has the economic and financial policy portfolio, Guo as party boss, and Yi with operational charge of the PBOC’s diverse toolkit.

“Liu is the strategist, Guo is the enforcer and Yi is the implementer,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. “Guo has been the key driver behind the new laws and regulations that have been coming out of the CBRC over the past year and half. And those have been hugely important to the de-risking program.”

To understand how China is likely to run its economy with such a system — and why having dual leadership at the central bank could even be a good thing for global investors, here are a few explanations:

What’s a party secretary and why does the PBOC have one?

In Xi's China Even the Central Bank Has a Party Boss at the Helm

Guo Shuqing

Photographer: Qilai Shen/Bloomberg

China’s government ministries and state-owned companies each have an official designated to be the Communist Party’s representative, for the purpose of communicating the party’s will and reporting back on the body’s work.

Xi has given the party a greater role in the workings of government and the economy. The government restructuring approved this month at the National People’s Congress was tailored to “strengthening the Communist Party’s overall leadership of the state.”

While it is undoubtedly a powerful agency within China, and sits astride a $5.7 trillion balance sheet that looms over that of the U.S. Federal Reserve, the PBOC is subordinate to both the higher echelons of government and to the party. Unlike the Federal Reserve or the European Central Bank, the PBOC is not independent.

What Our Economists Say:

“It would signal continuity with departing Party Secretary Zhou Xiaochuan on pro-market reform and opening,” Bloomberg economists Tom Orlik and Qian Wan wrote in a note. “Guo is deeply experienced, a heavyweight policy maker, and has spent his career pushing pro-market reforms.”

How would a party chief’s role differ to that of a governor?

In the recent past, the governor has also been party secretary, giving him control of the central bank within limits set from above. Zhou Xiaochuan, who led the PBOC for over 15 years until this month, used his technocratic track record to also set the political tone, and pressed his masters to go further along the road to financial opening.

Splitting the positions would be the latest example of how Xi’s China gives the party supremacy, so whoever holds the political job rules the roost. Unlike in economies where independent central bank governors may come into conflict with their political masters — if they tighten monetary policy faster than elected officials would like, for instance — the chances of China’s central bank doing anything against Xi’s will are now even closer to zero.

Doesn’t Guo already have a job as top banking regulator?

Yes. Guo leads the newly-merged banking and insurance regulator. In his previous job as chairman of the China Banking Regulatory Commission he led a crackdown on shadow financing and helped mitigate risk in the interbank lending market. He also played a high-profile role in reining in the overseas activities by some of China’s most acquisitive companies. That seems to have paid off politically, as he’s now been entrusted with maintaining the strategic direction in a crucial area of policy.

What will this mean for China’s monetary policy?