China economy

All eyes on central banker Zhou after finance minister Lou steps down

Economic observers ask when the 68-year-old governor will retire, and who can replace him

PUBLISHED : Sunday, 13 November, 2016, 7:01am
UPDATED : Monday, 14 November, 2016, 10:46am

After China’s finance minister Lou Jiwei retired, many China economic policy watchers are again asking how long it will be until Zhou Xiaochuan, China’s longest-serving central bank governor, steps down and who can replace him?

The answer matters for the Chinese economy and the world because Zhou and Lou are regarded as the cream of the pro-market Chinese technocrats who argued for China’s transition from a command to a market-based economy, as well as for China’s integration into the world economy. They have played important roles in drafting and implementing economically liberal measures.

The duo’s belief in creating a properly functioning market system, without challenging the absolute power of the Communist Party, started to influence and shape China’s economic policies as early as the 1990s. Partly due to their guidance, China’s monetary and fiscal policies, at least on the surface, resemble those of the United States more than of the former Soviet Union.

Lou’s departure and Zhou’s expected retirement, therefore, raise doubts as to whether Beijing has the willingness or capacity to deepen its market liberalisation. The absence of a group of “reformists” in the economic policymaking area could lead to ill-designed policies and a retreat to the old days of administrative control, analysts said.

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“Chinese economic reform is going in reverse towards a more state-dominated model,” said Christopher Balding, an associate professor with the Peking University HSBC Business School in Shenzhen.

“Unfortunately, the recent personnel movements seem to confirm this shift,” he added. “It does appear as if people that might be more economically reform minded are being moved away from key positions, indicating a deeper foundation for a more state-centred focus on economic policy.”

The appointment of a new finance minister was announced earlier this month by the country’s legislature when Lou was accompanying Chinese Premier Li Keqiang on a foreign visit. The new minister, Xiao Jie, worked previously as China’s tax administration chief and there were few records of his views apart from a 2010 article saying China has room to raise taxes.

Chinese media outlet Caixin online said on Thursday that Lou had become the fifth chairman of the National Council for Social Security Fund. The appointment was not unexpected as three of the four former (NSSF) chairmen were retired financial ministers.

Gossip about Zhou leaving has been circulating for years. Reuters and Bloomberg reported Zhou’s departure years ago, although both were later proved wrong, and the Wall Street Journal in September 2014 reported that Chinese President Xi Jinping was considering removing Zhou, but that also didn’t happen.

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However, it’s clear that Zhou, at 68, is getting close to retirement. The unusual extension of his tenure was deemed to be because of the lack of a strong successor, and a reflection of the difficulties in pressing ahead with market-oriented reforms to reshape the pattern of economic growth.

While Zhou has achieved much in the past 14 years, including revitalising China’s state banking system, creating a huge onshore bond market, freeing up interest rate controls and making the yuan a nominal international reserve currency, there is still plenty to be done by his successors, including opening up the capital account to make the Chinese currency a truly convertible currency.

However, after seeing massive capital outflow since late last year, the Chinese authorities have been tightening restrictions on capital flow.

“The pace of the yuan’s reform could have moved faster,” said Chen Long, an economist with Gavekal Dragonomics. “The authority missed the chance to tolerate more flexible movement of the yuan in 2013 and 2014. But we still have hope to realise a free float in the coming two years.”

It has been a guessing game for a while as to who will succeed Zhou as the new central bank governor. The favourites so far include PBOC deputy governor Yi Gang, China Securities Regulatory Commission chairman Liu Shiyu and Bank of China chairman Tian Guoli.

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“I am confident the PBOC will retain a reform-driven mindset, but the pace of reform may slow due to increasing uncertainties and risks globally and increasing tension and challenges facing Chinese economic growth and financial stability,” said Zhu Ning, a finance professor at Tsinghua University.

Yi of the PBOC, who headed the management of the foreign exchange reserves for seven years, is also a vice-director with the central economic and financial working group, an economic advisory body reporting directly to Xi.

CSRC’s Liu replaced Xiao Gang after a disastrous response to stock turmoil earlier this year, and quelled the market while favouring stability over reform.

“The [financial] reform does not depend on one personality,” said Tim Condon, head of Asian financial market research at ING. “It comes from the top. Whoever takes over the central bank, he will manage to stay the course laid out by Zhou without too much interruption.”