A little impatience can spoil great plans. So goes a popular Chinese proverb, which must be running through Yi Gang’s mind as he takes the helm at the world’s second-most-powerful central bank.
For more than a decade, Yi was understudy to People’s Bank of China governor Zhou Xiaochuan. As Zhou retires, Beijing has chosen wisely, and safely, in handing the keys over to Yi. And Yi will be tempted to move patiently as he eases into this new role. But impatient global forces might not hear of it.
The latter part of Zhou’s 15-year tenure saw the internationalization of the PBOC. Yi will face an acceleration in the central bank’s global footprint from Day 1. While there is no parallel for where the PBOC finds itself, Alan Greenspan’s time at the US Federal Reserve may provide some clues.
When Zhou took over in 2002, it was a bit closer to where the Fed was in 1987 when Greenspan came in as chairman. Over the next decade, the Fed’s international brawn grew exponentially. In 1994, its aggressive tightening moves slammed Mexico. Then, when Asia blew up in 1997, the Fed jumped in to tame global markets with liquidity and soothing words.
At the time, Greenspan called the US an “oasis of prosperity.” What he really meant, though, was that the Fed had become the world’s central bank.
The Fed system has 12 districts. Over the last couple of decades, Latin America unofficially morphed into the 13th district, Asia the 14th, Russia the 15th, and so on.
Now consider China’s journey since 2002, back when its economy generated just US$1.5 trillion of output. Since then, Chinese gross domestic product has surged to about $12 trillion annually. China became the No 1 trading nation, the top oil importer and Washington’s main banker, with some $1.2 trillion of US Treasury debt holdings. In 2017, China generated one-third of global demand.
The growth industry in economic circles is PBOC-watching. Around the time Greenspan was settling in in the late 1980s, the forecasting community was gorging on William Greider’s Fed book Secrets of the Temple. Now, it’s the goings-on behind the PBOC’s seemingly impenetrable walls that tantalizes analysts and journalists. That’s a product of the PBOC’s rapidly growing influence.
These days, Germany’s Bundesbank is loading up on yuan. And Bank Indonesia has become the ninth central bank to open an office in Beijing. Thailand is the latest Asian peer to enter a currency-swap arrangement with Beijing.
This is the fast-changing environment into which Yi is stepping. As the PBOC changes interest-rate policies, alters reserve requirements or guides the yuan up or down, global markets hang in the balance. Sure, direct linkages between the PBOC and global markets are small compared with the Fed’s. But the events of recent years offer a hint of what’s to come.
In August 2015, markets shook in response to Beijing’s move to change how the yuan trades. One month later, resulting uncertainty in markets dissuaded the Fed from going ahead with an interest-rate increase. Since then, any whiff of mainland inflation, slowing GDP or macro-prudential tweaks in property and other asset markets garners global attention.
Stability begins at home, though. Right out of the gate, Yi must step up efforts to curb risks in China’s $40 trillion financial system. Since the 2008 global crisis, China’s debt-to-GDP ratio has been on a course toward 130% and beyond.
As President Xi Jinping’s ambitions grow, he is amassing absolute power and settling in for a long reign – perhaps until death. It falls to Yi’s team to reinforce the fundamentals to back up Xi’s vision. That means keeping China on the reform path and managing the Greenspanization of a central bank that, ready or not, is being thrust into the spotlight by impatient global forces.