Financial Commission: another pillar in China’s new government structure – Victor Shih

 

Victor Shih

Xi Jinping has been building up a new government structure and the just-installed Central Financial Commission will be key in making financial decisions for the central government, says political analyst Victor Shih in the Financial Times. The “de facto watchdog, planner, and decision maker for China’s US$61tn financial sector, weakening the power of state institutions such as the People’s Bank of China and China Securities Regulatory Commission.”

The Financial Times:

Wang Jiang, a veteran state banker, has been appointed executive deputy director of the office of the commission, reporting to He Lifeng, a vice-premier and Xi’s new economic tsar, the people familiar with the new body said.

Victor Shih, professor of Chinese political economy at the University of California, San Diego, said businesses should expect to be affected by the commission, which will have the final say on important deals including major mergers and joint ventures.

Shih said the commission would also control mid-level state financial sector personnel appointments and the regulations applied by government agencies. State institutions such as the central bank have already suffered a decline.

Since August, the chairs of some state banks have in effect outranked the PBoC governor in the Communist party hierarchy.

More in the Financial Times.

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China needs to do more to get users for the digital yuan – Winston Ma

 

Winston Ma

China financial authorities have started to introduce the digital yuan in January, but financial analyst Winston Ma sees more has to happen to seduce a billion Chinese internet users to use the virtual currency, he tells at CNBC. And what is the goal of China’s central bank?

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Yi Gang has best cards to become PBOC-governor - Victor Shih

+Victor Shih 

Speculations have been mounting the current governor or China´s central bank PBOC, Zhou Xiaochuan, is up for retirement soon. Bloomberg asked financial experts who they expect might be the next central banker. Financial expert Victor Shih explains why he puts his cards on Yi Gang.

Bloomberg:

Yi, who holds a doctorate in economics from the University of Illinois, has been managing the country’s foreign-exchange reserves, now at $4 trillion, since July 2009. This year he also became a deputy director of the Communist Party’s Office of the Central Leading Group for Financial and Economic Affairs, a key position in mapping out policies. 

A onetime competitive swimmer who studied and worked in the U.S. from 1980 to 1994, Yi joined the PBOC in 1997 and often represents China at international meetings. 

“As the Fed begins to contract global liquidity and move U.S. rates higher, it is more important to have someone with extensive understanding of the linkages between external and domestic liquidity,” said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance, and wasn’t a survey respondent. “In that area, I think Yi Gang has the deepest experience,” Shih said in an e-mailed response to questions.

More in Bloomberg.

Yi Gang

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New tools for China´s central bankers - Sara Hsu

+Sara Hsu 

One of the reforms in China have changed the way it´s central bank is operating, writes financial analyst Sara Hsu in the Diplomat. A new set of tools allow the bankers to be more creative.

Sara Hsu:

China also has some new tools to add to the traditional monetary policy system. The People’s Bank of China introduced a standing lending facility in 2013, which provides funds to banks facing a liquidity squeeze. The standing lending facility was expanded in January of this year to lend to small and midsize banks in 10 provinces and cities. In addition, relending has been used historically and again today to provide incentives for banks to lower financing costs when lending to targeted sectors. Recently, the central bank has added a new tool, called pledged supplementary lending to help banks target borrowers with collateral. Pledged supplementary lending targets medium-term interest rates and, like relending, avoids the blanket changes to the monetary system that are associated with traditional tools. 

Some analysts feel that the targeted tools go too far, into the realm of fiscal policy. In particular, the practice of relending and the new pledged supplementary lending tool give preference to specific sectors. However, these tools counteract a long-standing complaint that monetary policy is a blunt instrument. Targeting particular segments of the economy sharpens the policy. And why shouldn’t the central bank go further? After all, it is not independent of the government. Government bodies in China are expected to follow policy mandates, and the central bank is no exception. 

Perhaps a more salient question is whether these creative monetary tools will allow market forces to emerge, or whether they will perpetuate a financial regime of policy-led lending. One major problem with China’s banks, recognized by analysts for decades now, is that financing is constrained since banks tend to lend to particular enterprises, mainly large and state-owned enterprises. With new, directed lending, market forces continue to be left out of the picture. Less efficient and less profitable enterprises may receive funding while more efficient and more profitable enterprises may be unable to secure a bank loan. In this case, the latter are forced to turn to the shadow banking system to obtain funding. 

The shadow banking system is, well, shadowy – it may face challenges in controlling for risks, especially since shadow banking loans often come at higher interest rates. This gives rise to adverse selection, in which borrowers who are willing to pay higher interest rates are often riskier firms. An expanding shadow banking system (with the exception of informal finance, in which borrowers and lenders have preexisting relationships) may therefore pose economic risks that banks would be able to control. 

Doubtless the People’s Bank of China has a difficult task, particularly in a less buoyant economy. The leadership wants to maintain a stable economic growth rate, and this poses a challenge since market forces would otherwise most likely act to pull economic growth down. The central bank is currently playing a major role in balancing the economy. Ironically, to meet long-term financial reform goals that entail opening up to market forces, the central bank must be less involved in targeting individual sectors. The impact of less directed lending will be more financial capital available to other enterprises, hopefully those that are efficient enough to remain strong during the next economic downturn.

More in the Diplomat. 

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form. Are you looking for more financial experts at the China Speakers Bureau? Do check out this recent list. 

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Making sense out of PBOC´s policies - Sara Hsu

+Sara Hsu 

Financial analyst Sara Hsu tries to make sense out of the long list of policy changes the central bank, the People´s Bank of China (PBOC) has announced in the past year, under the Xi-Li government. "Right now, the opaque is becoming more transparent," she writes in The Diplomat.

Sara Hsu:

While the Xi-Li administration made it clear from the outset that they were pursuing financial marketization, it was unknown one year ago exactly how PBOC policy would seek to meet this general target. Now it is somewhat more transparent; the PBOC is carrying out major reforms every four months or thereabouts, with the first major move on July 22, 2013. The reforms truly are moving in the direction of financial liberalization, yet continue to control for risk. 

Right now, the opaque is becoming more transparent; the general more specific, and one might assume that this will continue. To predict what major financial reforms may occur going forward, therefore, one must look back to the important meetings referenced in the statement above. The central government has already announced that the deposit rate ceiling will soon be lifted; according to this (very briefly established) pattern, this might take place in July, four months from now. We shall soon find out.

More in The Diplomat.

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