The People’s Bank of China conducted reverse repo operations of RMB500 billion by interest rate bidding on February 4, 2020.

If politics in China resemble a complex, giant jigsaw puzzle, then the economy has to be compared to an intricate maze of uncertainty. In a flurry of speculation and statements, one crucial aspect of this conundrum has become crystal clear, President Xi Jinping looks certain to serve a third term in office.

When this is used as a “primer”, it becomes easier to crack the code into the secretive world of cabinet reshuffles and economic policy.

“[A new line-up] won’t change the fact that all big decisions regarding the direction or the pace of liberalization will be decided by President Xi,” Aidan Yao, a senior emerging Asia economist at AXA Investment Managers, told the South China Morning Post in Hong Kong.

“These people will serve, first and foremost, as advisers to [him] to implement and execute what he wants,” he added.

The proposal by the Communist Party of China’s Central Committee to scrap the two-term limit, which was announced on Sunday through the state-owned Xinhua News Agency, paves the way for President Xi to stay in power beyond 2023 after his 10-year period in office expires.

It will also allow him to hand-pick his inner circle with the economy a major priority. Grappling with excessive debt, off-balance sheet activities and market misdemeanors in the financial sector are just some of the problems on the horizon for his team.

Supply-side structural reforms, including curbing overcapacity in bloated state-owned enterprises, are other key issues.

At the heart of crafting and implementing policy will be the People’s Bank of China. The de facto central bank is locked at the hip to Beijing and run by Zhou Xiaochuan, an erudite 70-year-old.

Remarkably, he is China’s longest-serving head of the PBOC after taking over in 2002 but is expected to retire around the time of next month’s annual session of parliament.

“Reducing corporate debt and eliminating ‘zombie companies’ [which are propped up by government-backed subsidies] are crucial to preventing a future financial crisis,” he said in an article for the Shanghai Securities News in a parting shot last year.

During his time as governor, he has transformed the POBC from a backwater bank into a major international institution, pushing through reforms to drop the country’s hard peg to the dollar, easing interest rate policy and gaining reserve status for the yuan at the International Monetary Fund.

All this has been achieved while maintaining “stable growth” in the high single digits.

Still, the challenges ahead are even more daunting as the economy shifts from being fueled by exports and investment to one driven by consumption, services and technology.

The new governor will face a myriad of conflicting problems, which is why the favorite appears to be President Xi’s trusted confidant Liu He. The 66-year-old Harvard-educated economist is a member of the all-powerful Politburo Standing Committee and created a splash at the World Economic Forum in Davos last month.

“China’s reforms started in 1978 [under then paramount leader Deng Xiaoping] and created [the] economic growth miracle,” Liu said. “The best way of commemorating the 40th anniversary is to launch more forceful measures.”

In short, that means accelerating reforms throughout the financial sector and the broader economy, as well as making the yuan a truly international currency.

Along the way, this has to be balanced with the need for social stability, the ruling Communist Party’s main objective, and the changing brief for the POBC as a government guardian against “systemic financial risk.”

“China has to fight three critical battles in the next few years – risk prevention, poverty reduction and pollution control,” Liu said in Davos. “To build a moderately prosperous society, we must fix the shortest plank in our development through winning these battles.”

The world’s second-biggest economy also has a disjointed regulatory system across the banking and financial sectors, and this has prompted calls for a “super regulator.”

Significantly, that seems unlikely to happen. Xu Zhong, the head of the PBOC’s research department, indicated that Beijing had ruled out a merger of its banking and insurance regulatory bodies.

“In the current environment of frequent financial chaos, we should strengthen the central bank’s overall role,” he was quoted as saying in the Chinese financial magazine Caixin.

Increasing the PBOC’s reach will need a strong governor and Liu fits the bill, especially since he will probably be handed a second portfolio as vice-premier in charge of economic and financial affairs at next month’s legislative session.

He has already advocated that the central bank’s brief should be expanded and beefed up by taking over key responsibilities from the main economic policymaking agency, the National Development and Reform Commission, and the Ministry of Finance.

“Our focus needs to change from ‘Is there enough?’ to ‘Is it good enough?” he said. “Such a transition is the context in which China formulates its macroeconomic, structural, reform and social policies in the coming years.”

Alongside a possible new role for Liu, will be the return of the former anti-corruption tzar, Wang Qishan, who was forced to stand down from the Politburo Standing Committee in October because of his age.

Known as President Xi’s “enforcer”, the 69-year-old is another close advisor and has been mentioned as the next vice-president in Beijing’s corridors of power. The brief would certainly complement Liu’s management skills.

“It is clear that [President] Xi has been able to keep his right-hand man at his side all along,” the Nikkei financial newspaper reported.

As the jigsaw puzzle takes shape, it looks increasingly certain that the most powerful man in China will rely on Liu and Wang to micro-manage his policies. Indeed, it appears they are more than happy to come along for the ride.

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