David Marsh, Adam Cotter and John Adams: What China's New Governor Should Do
2018-03-27 IMI- Intensify attempts to rein in mounting debt through strengthening watchdog activities – where the PBoC has recently been given enhanced regulatory powers – and promote financial sector reform. Zhou and other officials have often highlighted asset bubbles, dangers from shadow banking activities and high debt among corporates and households. Yi must show he can preside over effective remedial action.
- Make a special effort over curbing hazards in public private partnerships – a fast-growing area of the Chinese economy that has expanded partly because local authorities have been trying to offload debt towards private investors. PPPs are a hidden danger for Chinese borrowers, lenders and regulators that will grow over time. Although this form of buttressing growth through new vehicles for debt and equity financing has its uses, Yi should show he is aware that it could become addictive and even lethal. Many PPP legal contracts are poorly understood and unenforceable.
- Enhance efforts at currency internationalisation, continuing the renminbi's advance after becoming part of the International Monetary Fund's special drawing right in October 2016. Providing a framework for capital market inflows and outflows, within the constraints of China's continuing capital controls, could provide a bubble-mitigating safety valve for pent-up domestic investment demand. This would also create a way for international investors, including central banks and sovereign funds, to diversify assets.
- Build on existing campaigns to reinforce international monetary co-operation. The sometimes-mooted idea of building a currency swap network with the US Federal Reserve seems unlikely to materialise. However, partly because of worries about US unilateralism, Japan and China appear to be trying to improve co-operation as well as bilateral portfolio investment. In line with an increase in regional trade and Asian financial collaboration, Yi could step up similar efforts elsewhere in Asia, including through the Belt and Road initiative. Some observers say this vaunted plan to expand infrastructureinvestment throughout Eurasia could itself become an untameable source of risk.
- Strengthen initiatives on improving transparency and reliability of Chinese economic statistics. Under Zhou's tenure, China has made considerable strides, for example in improving Beijing's co-operation with the IMF, the Bank for International Settlements and other bodies. More could be done to heighten the credibility of mainstream economic data. Yi could support efforts to improve understanding of how central banks are holding a greater number of reserve currencies – including the renminbi – as well as gold, in line with the PBoC's own considerable reserve diversification over the past decade.
