Author: Coco Kee, Managing Partner of KGA
YI Gang was recently appointed as the head of the People’s Bank of China (PBoC), China’s central bank, to succeed Xiaochuan, who will soon retire after leading PBoC for 16 years. The appointment is as important to China as to the U.S. for the following 4 reasons:
I. PBoC is somewhat equivalent to the U.S. Federal Reserve
PBoC’s U.S. counter-party is the Federal Reserve and YI Gang similar to Jerome Powell, current Chair of Fed, though the PBoC and Fed are different in multiple aspects, including structure, affiliation functionality. Unlike the Fed, the PBoC is a government entity within the State Council, responsible for setting and executing monetary policies, preventing and addressing financial risks and maintaining the stability of the currency RMB.
Recently, the PBoC is taking on more responsibilities with regard to monitoring and regulating financial institutions, similar to the role the Fed has played since the 2008 financial crisis.
II. The first “Sea Turtle” educated in the U.S. who joined the PBoC
“Sea Turtles” refer to Chinese returnees educated in the West. spent 14 years in the U.S. before taking his position in 1997 with the PBoC, where he has remained ever since.
was among the first group of people admitted to through a national exam after more than a decade-long shut-down of China’s higher education, as a result of the Cultural Revolution. He was admitted in 1978 to Peking University, or Beijing University, the top school in the country.
In 1980, he was hand-picked and financed by Peking University to go to the U.S., where he first studied at Hamline University in Minnesota and later the University of Illinois where he earned economics. Subsequently, he became a tenured professor of economics at the University of Indiana where he taught until 1994.
In 1994, together with 5 other returnees, including Justin Yifu Lin, former Chief Economist of the World Bank, he founded the China Center for Economic Research (CCER), now called the "National School of Development," at Peking University.
Since 2015, CCER's researchers have been coming to the U.S. to share their annual forecast of China's economy hosted by New York Stock Exchange.
Unlike the majority of sea turtles who often find it challenging to work Chinese governmental institutions, never let his training in the U.S. get in the way and, in fact, had worked very well over the years with his locally trained colleagues, all the while slowly and steadily rising through the ranks of the PBoC.
III. A realistic idealist
has his but at the he is fully aware of the reality with which he deals. He does not lose his perspective. He returned to China when its financial infrastructure was embryonic and chaotic to pursue his dream of helping his country build it. He diligently and patiently carried out his duties and played his role in the government while also expressing his concerns over issues and problems, such as water shortages. For a time he minimized toilet flushing in his home in an attempt to save water.
He understands and embraces the government’s ambition to make the RMB a global reserve currency. At the same time, he points out that compared with other reserve currencies and their financial markets, China is not there, yet. It takes time for things to mature and decision-makers should “stay calm and keep breath smooth”(心平气和).
Deep in his heart, YI is a believer in the market. However, he takes a more balanced approach. He knows that things do not happen overnight, especially in China, given its size, complexity diversity, where there is a real risk of serious trouble if prudence and proper caution aren't embraced.
His appointment gives some Chinese hope that he may help push for more clarity of policies when it comes to cryptocurrency. As early as 2013, when asked about his thoughts with regard to Bitcoin, he commented that from the standpoint view of the PBoC, Bitcoin would not be considered legitimate in the near term, but he personally thought people had the freedom to trade Bitcoin through the Internet. He also noted at that time that he personally thought Bitcoin quite unique and intriguing.
He is known for being very poised and reserved and for never losing temper. He looks more like a scholar than a bureaucrat.
All these qualities, in addition to his accomplished career with the PBoC, made him stand out and win the trust of LIU He, Vice Premier in charge of economics and finance, Xi protégé and advisor.
IV. Why YI’s Nomination is Important to the U.S.
China is sending a clear signal to the West, especially to the U.S., about its attitude towards the reform of its financial markets. Both of the nominees were educated in the U.S. and have been the advocates of reform.
LIU has been instrumental in the past years helping the country reduce overcapacity and pivot the economy towards a more consumption-driven one. Together with LIU, through wisely managing monetary policy, YI Gang will try to address the challenges of neck-breaking debt, asset bubbles, maintain the stability of the financial system, while still keeping the supply of capital ample to support Chinese companies’ expansion both in China and overseas. His predecessor ZHOU Xiaochuan has definitely not left him with an easy job. The good news is that YI Gang has the support of LIU and XI.
If LIU or did not deliver changes or reforms fast or significant enough to appease the U.S., it may be more a result of their dealing in their minds prudently with the variety of challenges they are inheriting than their desire to do so.
The following is an excerpt from a paper by YI Gang published in the Cato Institute’s Journal in 2008 and it appears to well reflect what China has been working on the past 5years. For the full paper, click here.
"The RMB exchange rate is an economic issue. The best way to bring about an equilibrium exchange rate is further reform. dialogue will help speed up the reform process and make the convergence to a new equilibrium smoother. However, it should be noted that it takes time to establish an efficient market.
... To move toward equilibrium, coordinated policy measures are needed for structural adjustment. To resolve China’s large trade surplus and restore external balance, measures are required for promoting domestic demand, increasing imports, investing abroad, and accelerating urbanization—in addition to currency appreciation. In fact, many measures can generate impacts similar to currency appreciation, such as imposing environment protection requirements, enhancing labor standards, strengthening labor protection, and upgrading the judiciary system. All these measures mean higher costs, lower competitiveness, and a reduced trade surplus, which will move the economy toward equilibrium. Also, it is important to recognize that it will take time for these measures to bring about structural changes. Policymakers in Washington and elsewhere should be patient as China makes its way toward a full-pledged foreign exchange market. "