BOFIT Viikkokatsaus / BOFIT Weekly 2018/12

Yi’s appointment was announced at the end of the People’s National Congress this week. Outgoing People’s Bank of China governor Zhou Xiaochuan (70), who was appointed to the central bank governor position in 2012, will now retire. His replacement, Yi (60), has worked at the PBoC since 1997 and served as deputy governor under Zhou for the past ten years. He also led the State Agency of Foreign Exchange (SAFE) in 2009–2016, during which time capital controls were relaxed and the yuan’s role as an international currency was strongly promoted. Yi took his PhD in economics at the University of Illinois before moving on to an academic career in the US and elsewhere.

Yi is expected to continue Zhou’s reform-minded approach. It should also keep the PBoC at the forefront in implementation of China’s economic reforms. Yi has already promised a number new reforms in the near future.

Yi will face numerous challenges during his term as governor. He should use monetary policy to deal with increasing financial market risk and to lower China’s indebtedness while he is also expected to provide cheap credit in order to sustain high economic growth. The situation is further complicated by the fact that interest rates should start rising in many countries. China’s central bank is moving to an interest-rate-based monetary policy, but interest rates currently only augment the PBoC’s otherwise diverse policy toolbox. These tools are applied on a case-by-case basis depending on the particular policy objective and make the whole system quite opaque.

While China says that it is committed to the eventual adoption of a free-floating currency regime and deregulation of capital movements, it still has a long way to go. While China’s central bank functions as a part of government and lacks independence, the departing Zhou nevertheless succeeded in gradually opening the Chinese economy to the world and pursued reforms that led to the yuan’s incorporation into the IMF’s SDR currency basket in 2016. China’s enthusiasm for market reform and opening its economy, however, shows signs of fading. Economic opening requires reforms in other parts of the economy, including the banking sector, state-owned enterprises and local government financing.