China’s newly appointed central bank Governor Pan Gongsheng comes with a strong record of tackling financial risks, showing he’s unafraid to sacrifice economic growth in order to achieve longer-term stability.
(Bloomberg) — China’s newly appointed central bank Governor Pan Gongsheng comes with a strong record of tackling financial risks, showing he’s unafraid to sacrifice economic growth in order to achieve longer-term stability.
From managing the currency to cracking down on the property market, Pan will now have to draw on his decade of experience at the central bank to steer the economy through its current downturn. A key challenge will be balancing calls for more monetary stimulus against the risk of driving up debt in the economy.
A former deputy governor at the People’s Bank of China since 2012, Pan, 60, was promoted to the top post on Tuesday, taking over from Yi Gang, who retires. Pan was already appointed Communist Party secretary at the PBOC earlier in July — one of the two most-senior positions at the bank — and has been holding meetings with visiting officials like US Treasury Secretary Janet Yellen since then.
Pan has advocated for the cautious monetary policy of his former boss Yi, an approach that’s set the PBOC apart from central banks in the US and Europe in recent years. China provided only modest monetary stimulus during the pandemic, and has been cutting interest rates since last year while the other major economies have been hiking.
While Pan led market-oriented reforms in the banking sector and other areas, he’s also adopted tough regulatory steps intended to reduce financial risks identified by senior officials.
He is widely seen as having spearheaded the strict property measures imposed by regulators in 2020, which have resulted in a sharp contraction in the sector since then. Pan was also the public face for regulators’ probe into Ant Group Co. and other internet finance companies, and been outspoken on issues from cryptocurrencies to local government debt, taking a tough stance on safeguarding financial stability.
Even though Pan has a strong technocratic background with research stints overseas, “his appointment is not necessarily a sign that Beijing is returning to the growth-first and more market-oriented policies of previous decades,” said Neil Thomas, fellow for Chinese politics at the Asia Society Policy Institute’s Center for China Analysis.
His oversight of the property controls “shows he is comfortable with implementing growth-negative policies” to tackle structural problems, Thomas said.
Currency Controls
Pan is probably best known for his role in managing the currency. As head of the foreign exchange regulator since 2016, Pan has overseen China’s $3 trillion in foreign reserves. During his tenure there, he tightened capital controls and defended the currency verbally at critical times.
The new governor doesn’t have any apparent connections to senior elites in the Communist Party, and he exited a top party body late last year, raising questions about his political influence and concerns about the PBOC’s sway in setting policy. To be sure, unlike other major central banks, the PBOC isn’t an independent institution, and reports to the State Council, China’s cabinet led by Premier Li Qiang.
Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, said Pan will probably be reliable in carrying out the policies of top leaders.
“Pan is an executor who can implement state policies in a smooth and low-risk way, which is also why the appointment is a comfort to markets because there won’t be much surprises,” said Ding. The new governor will face the challenge of mounting calls for monetary easing and a shrinking space for cutting interest rates, he said.
Born in the poor countryside of Anhui province in eastern China in 1963, Pan had a humble start to his career, studying and teaching economics at a junior college in the adjacent Zhejiang province. He eventually worked his way to the prestigious Renmin University in Beijing, where he earned a PhD degree in economics. During that time, he translated an American labor economics textbook into the Chinese language.
After graduating in 1993, he joined Industrial and Commercial Bank of China Ltd., where he rose through the ranks to eventually became a star executive playing a central role in restructuring and taking the state lender public in Hong Kong and Shanghai in 2006. His expertise was tapped again for the Agricultural Bank of China Ltd.’s listing in 2010. The two were the world’s biggest initial public offerings when they went public.
Described by former associates as soft-spoken and scholarly, Pan has the technocratic approach of his predecessors at the central bank. He is known for taking a data and research-driven approach to problems and enjoys reading books about economics and finance in his free time.
Here’s a look at some of Pan’s comments in recent years on monetary and financial policies:
Cautious Monetary Policy
Pan affirmed the PBOC’s restrained approach toward stimulus in recent years during his last public speech in June. Speaking at the Lujiazui Forum in Shanghai, Pan said China’s financial cycles have been significantly less volatile than in the US, measured by the swings of sovereign bond yields.
“The reason behind China’s relatively stable financial cycles is that China has stuck with a prudent monetary policy in the longer term,” he said. “China’s monetary policy is primarily based on domestic conditions … it avoided following the Federal Reserve’s big tightening and loosening, and refrained from competitive zero interest rates or quantitative easing policies.”
With China’s top leaders adopting a more pro-growth stance at a recent key meeting, the PBOC under Pan will need to implement more easing.
“Pan has essentially no choice but to focus on the economic slowdown,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics. He may well personally want to return to a greater focus on risk prevention, but that will probably need to wait until next year at least, he said.
Defending the Yuan
Pan became head of the State Administration of Foreign Exchange in 2016 amid an exodus of money triggered by the yuan’s shock devaluation the year before. To stem the outflow, China imposed stricter controls over outbound investments and funds flowing overseas in other channels.
He warned companies against hastily pulling money out of the country and defended tighter scrutiny on the outflows, shrugging off complaints at the time.
“China has always had these reviews, and those meeting requirements can transfer money freely,” he said in an interview in 2017. “Companies can lodge a complaint with the foreign-exchange authority if they have any problems.”
The restrictions helped to steady the drop in foreign reserves in 2017. Over the years, China has allowed the exchange rate to become more flexible and market-determined, although the PBOC continues to exert influence over its level. Since Pan’s move to the foreign-exchange regulator, the currency has rebounded three times after breaching the key level of 7-per-dollar.
In 2018 he openly challenged yuan bears in a press briefing as it slid toward the weakest level in a decade.
“We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other,” Pan told a briefing. “I think we both have vivid memories of the past.”
Going forward, Pan will have to deal with the “impossible trinity” when it comes to managing the currency, said Standard Chartered’s Ding.
“On the one hand, China wants the yuan to internationalize, which means controls can’t be too tight,” he said. “But on the other hand, they don’t want to see big swings in the exchange rate.”
Property Controls
Pan is seen as the point person in the PBOC’s push to rein in highly-indebted property developers and introducing the so-called three red lines policy of debt limits, which eventually led to the default of firms including China Evergrande Group in late 2021.
In a press conference this year, Pan likened Evergrande and other developers’ problem to having a “stroke” from chronic unhealthy behaviors.
“Since the second half of 2021, some property firms represented by Evergrande have developed severe ‘high blood pressure’ due to their long-term business model of ‘high leverage, high debt and fast turnover.’ Their balance sheets were constantly in high-risk mode and eventually risks exposed. In an analogy, they had a ‘stroke’ from the ‘high blood pressure.’”
The control measures curbed the aggressive rise in property prices and asset bubbles, Pan said. Given the correction in the real estate market, authorities are taking measures to support its stable development and transition to a new growth model, he said.
The government has recently eased some property controls and signaled a further loosening of restrictions.
“Property is a serious problem facing Pan, and may well prove his biggest challenge over the long term,” said Beddor. “Policymakers want to prevent a collapse in the property market, but also reduce the economy’s reliance on property over the long term. That balancing act won’t be easy.”
Tech Crackdown
Pan has been outspoken about risks related to the financial operations of internet companies, culminating in financial regulators’ probe into Ant Group just ahead of the company’s planned listing in 2020 — a move that rocked the industry and investor confidence at the time. The crackdown on the tech sector ended this month with more than $1 billion in fines on Ant and Tencent Holdings Ltd.
Pan commented in written statements about the Ant investigation in 2020 and 2021, explaining objectives of the action on behalf of regulators.
“All financial activities must be brought under regulation in accordance to laws and rules,” he said in 2020. Ant was “indifferent to the law and defied regulatory and compliance requirements,” he said.
(Updates with economist comments.)
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