The once-dominant Central Bank of China has experienced a decline in influence as Beijing intensifies its efforts to centralize Communist Party authority over financial regulation. Additional Deputy Governors Are Replaced As The PBOC Continues to Rearrange
As Beijing resets its development model, a portion of the authority previously vested in the People’s Bank of China has been transferred to a restructured financial regulator and a party oversight body.
Although the governor continues to play a crucial role in daily money markets, his or her position in the party hierarchy is currently lower than that of the CEOs of certain banks that were previously regulated by the PBoC.
As part of a reorganization initiated by President Xi Jinping, the PBoC’s influence over domestic policymaking and its function as a conduit for communication with global regulators and markets would be diminished, according to analysts.
“The PBoC’s diminished status is one of the greatest casualties of the new financial architecture,” said George Magnus, an associate at the China Centre of Oxford University.
He further stated that the “modernizing and reformist inclinations of the PBoC” had been “a disguised Trojan horse” that enabled the government to test the waters of financial liberalization and incorporate additional market-oriented mechanisms into a system dominated by the state.
Presently, the central bank is relegated to a peripheral position as China grapples with sluggish development in the aftermath of the pandemic and an escalating debt crisis affecting local governments and the property sector.
“The PBoC has been especially hesitant to return to credit-financed investment as a growth driver,” according to a foreign academic who recently conferred with China’s top financial regulators, including the new central bank governor, Pan Gongsheng.
Although the central bank has consistently functioned under the supervision of China’s State Council, also known as the cabinet, its jurisdiction over financial affairs has been firmly established. It was regarded as a hotbed of talent within China’s policymaking apparatus over the past three decades, with its technocrats playing a pivotal role in defining financial regulations.
Former governor Zhou Xiaochuan oversaw the bank for fifteen years beginning in 2002, and other reformers established close personal relationships with foreign counterparts, including former US Treasury Secretary Henry Paulson.
Beijing, however, has effectively placed the PBoC under the supervision of the Central Financial Commission, an oversight body led by the Communist Party that has employed nearly one hundred individuals to monitor financial affairs, since March.
He Lifeng, the nation’s newly appointed economic and finance tsar and vice-premier, oversees the CFC office, which will have input into the PBoC’s highest-ranking appointments. According to official statements, he is subordinate to Li Qiang, the premier of China, who operates as the official president of the CFC and is de facto in charge of the country’s finances and economy.
In addition, the National Administration of Financial Regulation, a redesigned iteration of the banking and insurance regulator, has been established by Beijing to supervise all financial activities excluding the securities industry.
According to two individuals with knowledge of the process, over 1,600 county-level branches of the PBoC will be absorbed by the NAFR. By the end of 2021, the central bank had 1,761 such branches.
PBoC has also been the target of an anti-corruption campaign spanned years. Former vice-governor Fan Yifei was dismissed from office the previous year following a corruption investigation. Since May 2022, Sun Guofeng, the director of the monetary policy department at the central bank, has been the subject of an investigation.
The responsibility for supervising financial malfeasance and new financial activities, including the immensely popular e-payment system Alipay by Ant Group, has been partly delegated to the NAFR. Since a result, NAFR officials are responsible for daily oversight and administrative approvals of organizations like Citic and Everbright.
Unexpectedly appointed PBoC governor and party chief in August, Pan, an experienced central banker, was approaching 60, the unofficial retirement age for many Chinese officials, as part of the personnel reshuffle.
As per PBoC employees, the last-minute appointment appeared to result from a hurried, haphazard procedure, which surprised many individuals internally.
According to four individuals with knowledge of the situation, certain advisers and leaders of research departments at lower echelons, including those open to market-oriented reforms, have resigned or been demoted.
In March, Miao Yanliang, a former chief economist at the trading division of the State Administration of Foreign Exchange, the PBoC’s foreign exchange regulator in China, commenced employment at CICC, the preeminent securities brokerage in the nation. His former department, which regularly supplied vice-premier Liu He with policy proposals, is undergoing reform.
In the Communist party hierarchy, the presidents of certain state banks now hold a higher position than Pan. Examples of such individuals include Liao Lin of the Industrial and Commercial Bank of China, Gu Shu of the Agricultural Bank of China, and Cai Xiliang of China Life Insurance. While these bankers are all members of the party’s central committee, Pan does not, despite serving as a de facto overseer of the daily operations of these lenders.
Due to the significance attributed to hierarchy within the Chinese system, Pan’s influence regarding the strategic foresight of China’s financial matters is comparatively diminished. Both Safe and the PBoC failed to respond promptly to requests for comments.
Analysts speculate that the PBoC may not form policy but rather implement it.
The foreign scholar with whom Pan recently met stated that although Chinese central bankers are “well aware” of the nation’s economic challenges, they believe monetary stimulus is limited in scope due to the weakening renminbi and a debt overhang.
However, in response to State Council pressure to enhance economic sentiment, the central bank is increasing its use of these instruments. Last month, Pan stated in a speech in Hong Kong that the bank intended to increase its usage. By the end of September, these targeted credit support measures comprised 15% of the PBoC’s balance sheet.
To stimulate economic expansion, Beijing employs fiscal incentives as the principal instrument of management, supplemented by interest rates.
However, some analysts caution against disregarding fundamental economic issues and marginalizing the central bank.
Assistant professor of political science at Johns Hopkins University John Yasuda stated, “Monetary tools may be able to avert pressures in the short to medium term, but that is not enough to address difficult questions such as diminishing returns on investment, a shrinking labor force, and a shaky social welfare system in the long run.”
According to Victor Shih, director of the 21st Century China Center at the University of California, San Diego, the PBoC has argued against using balance-sheet expansion to roll over the enormous debt that matures daily. He stated, “The party’s capacity to oppose quantitative easing may be diminished with increased oversight.”