With the entire world likely facing long-term economic adjustments, China must keep its monetary policy stable and consistent to stay on the fast track to strategic development in a global race, according to the governor of the central bank.
Yi Gang, who is widely expected to step down soon as the People’s Bank of China (PBOC) governor, flagged some concerns on hot-button issues and offered advice in a recent article for the Journal of Economic Research.
He wrote about how the world’s second-largest economy should maintain positive interest rates in line with its potential growth – not like the big stimulus and ultra-loose monetary policies that triggered inflation and market volatility in the West.
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Yi would also like to see greater market-driven force and more flexibility in the yuan’s exchange rate regime, which could help China absorb external shocks, such as from aggressive US interest rate hikes.
“Maintaining positive interest rates is beneficial to providing positive incentives for the market, in line with the Chinese tradition of saving, and conducive to long-term social development,” Yi said.
As central bank governor since 2018, Yi kept inflation at bay in China, coped with coronavirus shocks, and helped achieve Beijing’s growth goals without turning the country’s debt crisis into a catastrophe.
To best support the real economy moving forward, Yi now suggests that China should keep a prudent monetary policy and avoid “helicopter money” – or printing and distributing of large sums of money to the public to spur economic growth. He also called for prioritising domestic demand, improving the marketisation of interest rates, stabilising market expectations and reducing the cost of corporate finance.
“[The PBOC] should fulfil the role of structural monetary policy tools and increase financial support for key areas and weak links in the national economy,” Yi said in the article.
Yi received a PhD from the University of Illinois and was a tenured associate professor at Indiana University-Purdue University Indianapolis.
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He is widely viewed as a pro-market official and an important aide to Liu He, who stepped down as vice-premier in March but now is believed to still play an important advisory role to President Xi Jinping.
The 65-year-old Yi did not get a place in the 20th Central Committee of the Communist Party in October. He received a senior advisory role in the Chinese People’s Political Consultative Conference in a bid to reassure markets and investors as the country fights against economic headwinds.
Yi’s removal as deputy party chief of the PBOC on July 1 signalled that he will leave the inner decision-making circle soon, and he did not show up at Premier Li Qiang’s symposium with internet platform companies on Wednesday.
“His ideas are consistent and clear: the monetary policy tools should fit in with the country’s economic performance and demand,” said Zhao Xijun, a finance professor at Renmin University in Beijing.
The governor has carried out a stable and cautious monetary policy in the past, and this has reduced macro risks and uncertainties faced by the market while mitigating economic volatility, according to Zhao.
The central bank will need to consider how to make its monetary policy better aligned with Beijing’s adjustments to fiscal, social and industrial policies while stabilising the recovery of the economy in the wake of pandemic shocks, Zhao added.
During his five-year tenure as bank governor, Yi was tasked with defusing financial risks, including the takeover of Baoshang Bank – China’s first state bank seizure in over 20 years – and the restructuring of many small and medium-sized commercial banks. The central bank also stepped up its regulation of internet finance and scrutiny of platform companies.
However, the PBOC’s “three red lines” for property developers – initiated in 2020 in response to President Xi Jinping’s stated principle that a house is to be lived in, not for speculation – triggered defaults of many private developers, including Evergrande. It later relaxed financing regulations to ensure property delivery, but the risks have not yet been fully addressed.
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Last year, the embezzlement of people’s banking savings in village banks in central China’s Henan province triggered massive protests.
Pan Gongsheng, head of the State Administration of Foreign Exchange, has been named party chief of the central bank. He also met visiting US Treasury Secretary Janet Yellen last week and is expected to succeed Yi at the helm of the central bank.
Pan, who has more than two decades of financial industry experience, with a track record of steering the foreign exchange regulator since 2016, will face challenges from the yuan’s depreciation relative to the US dollar, partly driven by China’s weak post-Covid recovery.
China’s one-year medium-term lending facility (MLF) rate was 1.9 per cent, down from 3.3 per cent five years ago and lower than the US benchmark.
The offshore yuan weakened to 7.17 against the US dollar on Thursday.
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