China has made the most significant changes to its economic governing in several decades. Following the National People’s Congress (NPC), Beijing has placed power for the regulation and oversight of the financial system in the hands of a governing group in the Chinese Communist Party (CCP). While there can be advantages to centralized regulation, the likely outcome is politically driven, inefficient macroeconomic policy. This could negatively affect China’s growth and financial stability.
Several new policies stand out. One is to strip the People’s Bank of China (PBOC) of its local branches, along with the nine regional branches that had been established as a vague imitation of the United States Federal Reserve Bank. Instead, the PBOC will institute provincial branches under the direction of the provincial Party secretaries.
A second important change is to appoint the new vice premier, He Lifeng, to the position of Party secretary of the PBOC, putting him in charge of economic policy both in the government and at the central bank itself.
Additionally, the banking and insurance watchdog will be absorbed into a new bureau – a Central Financial Work Commission – to oversee all financial sectors except the securities industry. The PBOC will no longer have oversight of financial holding companies and financial consumer protection. The chief of staff of Chinese leader Xi Jinping, Ding Xuexiang, will become the commission head.
More about picking personnel than policy
What is behind this centralization of economic policy and what should we expect in the future?
Xi has appointed trusted lieutenants with longstanding work experience with him to positions of power over economic policy. Ding Xuexiang has been Xi’s administrative assistant in a variety of roles including during Xi’s short stint as Party secretary in Shanghai in 2007 and later in the Central Committee’s general office. Ding does not have significant economic experience.
He Lifeng worked with Xi in Fujian (part of the so-called “Fujian Gang”) and moved to Beijing under Xi’s patronage. Although He has a PhD in economics, he is not known as a sophisticated policymaker but more as an efficient administrator. According to The Wall Street Journal, he pursued economic growth through aggressive state spending on urbanization and was known as “the big demolisher” for tearing down old buildings to make way for new developments. In this sense, he fits in with Xi’s state-led mindset.
Xi Jinping clearly has not been comfortable with the intellectual and political challenges that had been posed by senior officials such as economist Liu He, vice premier from 2018 till he stepped down at the NPC, and Li Keqiang, also an economist and premier from 2013 who was replaced by Li Qiang at the NPC. According to reports, both Liu He and Li Keqiang would disagree with Xi on policy.
The gradual shift to more “yes men” could have serious consequences on the direction of China’s economy. Was there a simmering conflict between the PBOC and the economic working group chaired by Xi Jinping? Or is this simply part of a larger concentration of power in Zhongnanhai?
Xi and the central bank appeared to have been on the same page with many economic policies. The deleveraging campaign was widely supported because it seemed to be commonly accepted that a collapse of the country’s property market – similar to the US financial crisis in 2008-9 – could result in a political crisis in China. Nonetheless, the severe impact of the three red lines policy on the property sector in 2020, which stripped the industry of its funding, may have convinced Xi that the PBOC’s tightening had gone too far and it was time to relax monetary policy.