Zhou Xiaochuan, governor of the People’s Bank of China, attends a news conference at the Great Hall of the People during the 19th National Congress of the Communist Party of China in Beijing. (Photographer: Qilai Shen/Bloomberg)  

In Xi's China Even the PBOC Governor Can't Get Around the Party

(Bloomberg) -- For international investors trying to gauge China’s monetary policy, life is set to get even more complex.

Guo Shuqing, a high-profile banking regulator and ally of President Xi Jinping in cleaning up the financial system, was appointed as Communist Party secretary of the People’s Bank of China, according to the central bank’s website.

In Xi's China Even the PBOC Governor Can't Get Around the Party

The move places Guo, 61, above newly anointed governor Yi Gang in the political pecking order and ushers in a management structure with few global equivalents. Guo was also appointed deputy governor, and Yi was named as deputy party chief, according to the site’s updated leadership section late Monday.

Yi will head the operational side of the central bank while Guo will oversee personnel and "reform," people familiar with the matter said earlier Monday, without specifying further. The New York Times first reported Guo’s appointment as party boss Sunday.

To discern policy in the world’s second largest economy, there’s now not just one official to watch, but at least three: Vice Premier Liu He, who has the economic and financial policy portfolio, Guo as party boss, and Yi with operational charge of the PBOC’s diverse toolkit.

"The institutional setup might be somewhat unorthodox by global standards, but as the past decade has indicated, integration between financial stability and monetary policy is the way forward," said Geoffrey Yu, head of the U.K. investment office at UBS Wealth Management in London. "We have two individuals with unimpeachable reform credentials running China’s financial and monetary operations."

To understand how China is likely to run its economy with such a system -- and why having dual leadership at the central bank could even be a good thing for global investors, here are a few explanations:

What’s a party secretary and why does the PBOC have one?

China’s government ministries and state-owned companies each have an official designated to be the Communist Party’s representative, for the purpose of communicating the party’s will and reporting back on the body’s work.

Xi has given the party a greater role in the workings of government and the economy. The government restructuring approved this month at the National People’s Congress was tailored to “strengthening the Communist Party’s overall leadership of the state.”

While it is undoubtedly a powerful agency within China, and sits astride a $5.7 trillion balance sheet that looms over that of the U.S. Federal Reserve, the PBOC is subordinate to both the higher echelons of government and to the party. Unlike the Federal Reserve or the European Central Bank, the PBOC is not independent.

What Our Economists Say:

“It would signal continuity with departing Party Secretary Zhou Xiaochuan on pro-market reform and opening,” Bloomberg economists Tom Orlik and Qian Wan wrote in a note. “Guo is deeply experienced, a heavyweight policy maker, and has spent his career pushing pro-market reforms.”

How would a party chief’s role differ to that of a governor?

In the recent past, the governor has also been party secretary, giving him control of the central bank within limits set from above. Zhou Xiaochuan, who led the PBOC for over 15 years until this month, used his technocratic track record to also set the political tone, and pressed his masters to go further along the road to financial opening.

Splitting the positions is the latest example of how Xi’s China gives the party supremacy. Traditionally an institution’s party boss has held more sway. Unlike in economies where independent central bank governors may come into conflict with their political masters -- if they tighten monetary policy faster than elected officials would like, for instance -- the chances of China’s central bank doing anything against Xi’s will are now even closer to zero.

Doesn’t Guo already have a job as top banking regulator?

Yes. Guo leads the newly-merged banking and insurance regulator. In his previous job as chairman of the China Banking Regulatory Commission he led a crackdown on shadow financing and helped mitigate risk in the interbank lending market. He also played a high-profile role in reining in the overseas activities by some of China’s most acquisitive companies. That seems to have paid off politically, as he’s now been entrusted with maintaining the strategic direction in a crucial area of policy.

What will this mean for China’s monetary policy?

Probably not much. Since becoming PBOC governor this month, Yi Gang has repeated that it will keep policy “prudent and neutral.” In practice, that has meant keeping liquidity in the banking system relatively tight while keeping borrowing costs for the wider economy low. Subordinate to the goal of defusing risks in the financial system -- identified by Xi as one of the “critical battles” for the next three years -- monetary policy under Yi will likely avoid any sudden shifts.

Guo as the PBOC’s party chief and deputy governor means he’ll be informed on the central bank’s policy developments, which will reduce the probability of monetary policy going contradictory to those from the banking and insurance regulator, according to Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank Ltd in Hong Kong.

"It’ll take time to see if the arrangement is effective," he said. "They’re two separate institutions and there could be inconsistent interests."

To contact Bloomberg News staff for this story: Jeffrey Black in Hong Kong at jblack25@bloomberg.net, Heng Xie in Beijing at hxie34@bloomberg.net, Haze Fan in Beijing at hfan40@bloomberg.net, Keith Zhai in Singapore at qzhai4@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Jeffrey Black, Heng Xie, Haze Fan, Keith Zhai