Guo Shuqing, the watchdog of China’s US$40 trillion banking and insurance industry, has the toughest job in global finance
- China’s banking system is twice the size of America’s
- The task of managing that system is getting harder by the day, as China faces its most uncertain economic environment since the global recession a decade ago, a state of affairs further complicated by the civil unrest in Hong Kong
Two months into his tenure as China’s top banking regulator, Guo Shuqing did something his staffers had never witnessed from a senior Communist Party leader.
Speaking in Beijing to officials and industry executives from across the country, he pledged to resign if he failed to snuff out the excesses that had been accumulating in China’s US$40 trillion banking system for almost a decade.
“This is a leader’s responsibility,” Guo said, according to people familiar with the April 2017 speech who asked not to be named discussing an internal matter.
His comments jolted the audience. Not only is it extremely rare for a high-ranking Chinese official to admit the possibility of defeat, but those listening also understood the enormity of Guo’s task. As steward of the world’s largest banking system – it’s twice the size of the US’s – the 63-year-old arguably has the hardest job in global finance.
And it’s getting more difficult by the day. China faces its most uncertain economic environment since the global recession a decade ago, a state of affairs further complicated by the civil unrest in Hong Kong.
Guo’s priorities – keeping China’s financial system stable and chipping away at the implicit state guarantees that underpin everything from asset-management products to bank deposits – are maddeningly contradictory.
But removing the government backstop could trigger a “rapid and chaotic” repricing of risk that results in exactly the kind of crisis Guo is trying to prevent, says Michael Pettis, a finance professor at Peking University and former banker at Bear Stearns.
To the dismay of China bears everywhere, Guo seems to be pulling off the balancing act. Since becoming chairman of the China Banking Regulatory Commission in early 2017, he’s published sweeping rules that ban implicit guarantees on US$14 trillion of asset-management products, closed thousands of struggling peer-to-peer lenders, allowed local companies to default on their debt at a record pace, and imposed losses on a troubled bank’s creditors for the first time since at least 1998.
Although his unprecedented campaign to rein in moral hazard has caused bouts of financial turbulence and contributed to the Chinese economy’s deepest slowdown in decades, the country has yet to experience anything approaching a crisis. China’s gross domestic product rose 6 per cent in the third quarter, slightly below estimates but still within the government’s target range.
“There is still a long way to go,” says David Loevinger, a managing director of emerging markets at TCW Group and former senior coordinator for China affairs at the US Department of the Treasury. Loevinger, during his stint at the Treasury from 2006 to 2012, met with Guo, a fluent English speaker, several times.
He describes Guo as “very disciplined and thoughtful,” with a “deep understanding of China’s financial challenges.” At the same time, Loevinger says, Guo recognised “that you couldn’t always take a cookie-cutter approach and drop Western regulatory systems into China’s financial system.”
Guo was born in China’s remote Inner Mongolia autonomous region in 1956, only a few years before Mao Zedong embarked on the Great Leap Forward, the disastrous industrialisation push that led to one of the greatest famines in history.
He spent his formative years sowing crops as part of a government programme that sent millions of young Chinese to rural areas in the 1970s. After the chaos of Mao’s reign subsided, Guo studied philosophy at Nankai University in Tianjin and received a master’s degree in Marxist and Leninist theory at the Chinese Academy of Social Sciences.
Guo, who declined to be interviewed for this story, knew he wanted to be a reformer from an early age. In 1984 he published one of his earliest articles, a 35,000-word opus titled Investigations on Reforming the Chinese Economy, and sent it, unsolicited, to the State Council, China’s cabinet, in hopes that top policymakers would learn from its recommendations.
He attended the University of Oxford as a visiting scholar two years later, after which he embarked on a tour of Eastern Europe that left him shocked by the bleakness of the region’s economies as Soviet communism faltered. He returned to China more convinced than ever about the need for change, including measures to loosen the grip of local governments on the economy, according to a memoir of his travels written in 1987.
His résumé includes senior positions at the central bank, the securities regulator, China’s second-biggest state bank, and the governors’ offices of Guizhou and Shandong provinces.
People who know Guo, including some who didn’t want to be named when talking about a senior member of government, describe him as one of the few high-ranking Chinese officials with both a strong scholarly bent and a knack for navigating the country’s tricky politics. Guo “was never shy about disagreeing,” Loevinger says. “But always in a very thoughtful way.”
Married, with a daughter, Guo has written at least 300 essays and 14 or more books. During his rare downtime, he’s said to enjoy listening to classical music and discussing topics such as the role of exchange rates in China-US trade relations.
Andrew Sheng, an international adviser to the China Banking and Insurance Regulatory Commission, who’s known Guo for more than 30 years, summed him up this way: “He can think, he can listen, and he can act.”
Guo’s political savvy was evident in March 2018 when he won a major vote of confidence from Chinese President Xi Jinping and vice-premier Liu He, Xi’s top economic adviser.
They merged the banking and insurance regulators and named Guo as chairman of the combined China Banking and Insurance Regulatory Commission, or CBIRC. He also became party secretary of the central bank, the People’s Bank of China. Altogether, this arrangement gave Guo more power than any of his predecessors.
Guo has steadily chipped away at that assumption by allowing shadow-banking products to fail, particularly in the peer-to-peer lending sector where standards were especially lax. New rules governing wealth-management products – set to take effect at the end of 2020 – would shift the industry away from a fixed-return model to something more akin to mutual funds in the US, where investors bear the risk of fluctuating market prices and can track their funds’ net-asset value every day.
Guo is “trying to diffuse any potential systematic financial risks by letting the market set the appropriate price for risk,” says Zhu Ning, a professor at Shanghai Advanced Institute of Finance, who advises the central bank and other economy-related ministries and has written a book on implicit guarantees.
Although Guo’s enforcement action was widely applauded by China watchers, some economists and traders criticised the opaque way in which it was handled. In the days surrounding the Baoshang Bank seizure, the CBIRC and the central bank didn’t communicate clearly what was happening, causing chaos in interbank markets and raising questions about how thoroughly policymakers had planned for the repercussions.
As of mid-November, it was still unclear to what degree Baoshang will serve as a blueprint for China’s troubled banks. The issue is likely to flare again: In July, UBS Group estimated that the Chinese lenders it monitors faced a capital shortfall of US$349 billion.
The government’s threshold for financial-market pain may be too low to allow Guo to enact major reforms, says Victor Shih, a professor of political economy at the University of California at San Diego. At Baoshang, for example, even though some creditors suffered losses, 99.98 per cent of them were eventually made whole by the government. Policymakers have subsequently orchestrated full bailouts for several of Baoshang’s embattled peers. “He will always come down on the side of ensuring stability,” Shih says.
Shih says Guo’s balancing act doesn’t just limit “big moves on reform”; it also holds back new ways of doing things. “He has tackled an issue that was deemed very important by the leadership,” Shih says, “and that was financial risk. Especially in shadow banking. But in the process of doing so, he in effect stifled what was previously a very vibrant and risky part of China’s financial system, which is shadow banking and financial innovation.”
How Guo handles the roll-out of China’s new rules on asset-management products will be a major test of his mettle. Some of the biggest Chinese banks are already lobbying regulators to delay implementation as lenders struggle to make existing products compliant and bring off-balance sheet loans onto their books, according to people familiar with the matter.
In an unusually pointed speech in September, Xiao Gang, the former head of China’s securities regulator who’s an adviser to the government, said the 2020 deadline for compliance was “unrealistic and unfeasible.”
Guo’s success may hinge on his ability to keep financial reform at the top of the Communist Party agenda by cultivating support from Xi on down.
One sign of optimism, according to a September report from Beijing-based policy research firm Trivium China: At least 13 officials with strong backgrounds in finance have taken high-ranking provincial government posts in the past three years.
Ultimately, however, the health of China’s vast banking system doesn’t rest on the shoulders of a single bureaucrat, no matter how skilful or respected or well-connected.