Inside the mind of the Chinese central bank’s new party tsar – Pan Gongsheng

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On July 1, the People’s Bank of China (PBOC) saw the appointment of a new party secretary – Pan Gongsheng (潘功胜), to replace Guo Shuqing (郭树清). Pan is a three-decade veteran of China’s banking sector who holds a PhD from Renmin University and has pursued study abroad at Cambridge and Harvard. 

At present, Yi Gang (易纲) – the incumbent PBOC governor, continues to retain the position he has held since 2018, alongside the office of PBOC deputy-party secretary. 

Given that party appointments generally outrank government appointments in China’s political hierarchy, the move effectively makes Pan the new helmsman. of the central bank.

Pan could also play a more assertive role than his predecessor in the role of central bank party secretary, Guo Shuqing, given that Guo simultaneously served as head of the China Banking and Insurance Regulatory Commission (CBIRC). 

The change in senior personnel at the Chinese central bank arrives following a major overhaul of the country’s financial regulatory framework that was unveiled at the Two Sessions congressional meeting held in March of this year. 

The overhaul saw China advance efforts to establish a “Twin Peaks” model of financial regulation separating the maintenance of financial stability from the scrutiny of market conduct and consumer protections. 

Key changes included the creation of a new State Administration of Financial Regulation (SAFR) (国家金融监督管理总局) to replace CBIRC. At the time CBIRC was led by Guo Shuqing – Pan Gongsheng’s predecessor as party chair of PBOC. 

Who is Pan Gongsheng?

59-year old Pan is a veteran of the banking sector with three decades of experience.

In 1980 Pan commenced his studies in economics at the Zhejiang Metallurgical Economics College (浙江冶金经济专科学校), where he subsequently held a teaching position. 

From 1987 to 1990 Pan pursued his master’s degree at Renmin University’s School of Labour and Human Resources. Pan would later complete his PhD at Renmin University in 1993. 

In 1993, Pan made his entry into the banking sector, marking the start of nearly two decades at big state-owned lenders Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China (ABC). 

From 1993 to 2008 Pan worked at ICBC, where he held a slew of positions including deputy head of the real estate lending department, deputy chief manager of the human resources department, chair of the joint-stock reform office, deputy head of the Shenzhen branch and secretary of the board of directors. 

From April 2008 to June 2012 he worked at ABC, where he held the positions of deputy head and executive director. 

During his time in the big state-owned banking system, Pan also spent two stints abroad studying at some of the world’s leading universities. From 1997 to 1998 he was a postdoctoral visiting scholar at Cambridge University, while in the first half of 2011, he pursued research at the Harvard Kennedy School of Government. 

In June 2012, Pan was appointed deputy governor of PBOC, and in January 2016 he succeeded Yi Gang in the key role of head of the State Administration of Foreign Exchange (SAFE) – PBOC’s forex authority. 

Since joining PBOC, Pan’s direct responsibilities have primarily pertained to forex and financial markets as opposed to monetary policy. 

With the latest appointment, Pan has leap-frogged ahead of Governor Yi Gang in PBOC’s leadership hierarchy, ascending from deputy governor to party secretary. 

What does Pan think?

Pan’s opinions on various issues in finance and economics are a matter of public record, particularly given his decade-long career as a senior PBOC official and his six-year tenure as the head of SAFE. 

He is the author of several books, including “The Road to Recovery for China’s Large-scale Banks” (大行蝶变-中国大型银行复兴之路), – winner of the 2014 Sun Yefang Financial Innovation Award (孙冶方金融创新奖), and “Municipal Bond Markets and Local Government Budget Constraints” (市政债市场与地方政府预算约束), published in 2014 and co-authored with PBOC’s then-chief economist Ma Jun (马骏).

In recent public statements, Pan has levelled critical remarks at the Federal Reserve for contributing to global downturns via reckless monetary policy. At the same time, Pan has emphasised the comparative “prudence” of Chinese monetary policy and the need to refrain from monetary “flooding.”

Pan has publicly expressed strong support for further reform of China’s financial system, including the further opening up of the capital account, as well as efforts to develop the country’s capital markets. 

Pan on post-pandemic monetary policy 

“In recent years, China’s financial cycle has been relatively stable. Since 2020, the yield-to-maturity of 10-year treasury bonds has fluctuated within a narrow range of between 2.4% and 3.4%. The difference between the highest point and the lowest point has been less than 100 basis points, which is significantly lower than the gap of nearly 400 basis points for the same period in the United States. Total social financing in China has maintained a growth rate of around 10%. 

“The reason behind China’s relatively stable financial cycle is China’s long-term adherence to a prudent monetary policy. China’s monetary policy adheres to the principle of focusing on itself, upholding cross-cyclical guidance that balances internal and external factors. It does not follow the Federal Reserves’ ‘large-scale expansions and contracts,’ and does not engage in competitive zero interest rates or quantitive easing policies.” (Remarks made at the Financial Street Forum in November 2022). 

“Since the outbreak of the pandemic in the first quarter of last year, major developed economies have implemented high-intensity quantitative easing monetary policies, greatly expanding the balance sheets of central banks.

“As far as China is concerned, we have always insisted on implementing a prudent monetary policy. China’s monetary policy is still within the normal monetary policy range, and we will not engage in ‘flooding.’ The space for us to exercise monetary policy is relatively large. This is the key difference between China’s monetary policy and the monetary policy of the Federal Reserve and other major economies since the beginning of the year 2000.” (In response to questions during a press conference held by the State Council Information Office in September 2021)

Pan on the importance of the “credit pulse” and the Fed’s global sway

Pan Gongsheng said at the Lujiazui Forum in June this year that the credit pulse is an important indicator to explain changes in domestic and global financial cycles. 

“Measured in terms of the marginal change in the ratio of new credit to GDP, China’s credit pulse has turned positive since 2023, indicating that credit’s role in supporting the economy is increasing. Looking forward, China’s economic operation will in general maintain a steady upward trend.

“Since the 1990s, various financial indicators such as asset prices, credit growth, bank leverage ratios, and cross-border capital flows have displayed resonance globally, especially in the developed economies of the United States and Europe. On a medium and long-term timeframe, financial activity is characterised by cyclical fluctuations. 

“Since the 1990s, there have been three sizeable downturn periods – the bursting of the Internet bubble in 2000-2002, the Global Financial Crisis in 2008-2009 and the ‘triple death’ of stocks, bonds and foreign exchange in 2022.

“If we construct a financial conditions index that incorporates various financial indicators such as stocks, bonds, and exchange rates to reflect overall financial conditions, there has been rapid and substantial tightening during these three downturn periods. 

“Because of the dollar’s dominance in the international monetary system, Fed monetary policy is an important driver of the global financial cycle. The Fed’s three rounds of interest rate hikes since 1999-2000, 2004-2006, and 2022 have led to three rounds of downturns in the global financial cycle .” (Speech at the Lujiazui Forum in June 2023)

Pan on financial reform

“Since the reform and opening up era, China’s financial sector has achieved considerable development, and its service capabilities have been greatly improved. However, there remain certain structural deficiencies in the supply of financial services, and the quality and efficiency of financial resource allocation are not yet adapted to the demands of high-quality economic development and the establishment of a modern economic system. 

“The main signs of this are: China’s financial operations are dominated by indirect financing, and the development of equity financing is severely inadequate. With regard to indirect financing, large and medium-sized banks are the main vessels, while the internal systems, policy arrangements, technical capabilities, and internal and external incentives and restraint mechanisms for commercial banks are imperfect. 

“Financial supply-side structural reform has rich significance, covering the following areas: 

First, adhering to the implementation of a prudent monetary policy to create a suitable monetary and financial environment for financial supply-side structural reform and high-quality development.

Second, firmly promoting the reform of the capital market, removing institutional barriers that restrict the development of the capital market, establishing a multi-tier capital market, expanding equity financing channels, and improving the quality of capital market development.

Third, optimising the configuration of large, medium and small-scale financial institutions, developing small and medium-sized financial institutions that focus on micro-finance services, and building a multi-tier, broad-coverage, and differentiated banking system and credit market system.

Fourth, adhering to the orientation of market demand, and reshaping the business philosophy, service model, risk management and assessment and evaluation mechanism of financial institutions.” (From a 2019 interview). 

Pan on China’s financial opening

“In 1996, China’s current account became convertible. In recent years, direct investment under the capital account has gradually achieved basic convertibility, and the degree of capital convertibility under the securities account has also gradually increased.

“The trend of China’s deeper global economic and financial integration cannot be changed. Therefore, we stick to one principle: open windows will never shut again. The foreign exchange management policy will not retreat, let alone return to the old path of capital controls.” (From a 2017 interview). 

Pan on real estate market demand

“Since the second half of 2021, some real estate companies have suffered from severe ‘hypertension’ due to long-term ‘high leverage, high debt, and high turnover’ operations. Their balance sheets have remained in a high-risk state, and this lack of sustainability has eventually led to risk. We can compare this to high blood pressure causing a stroke. 

“Coupled with the downward shift in the medium-to- long-term demand centre of the real estate market, and the impact of the three-year-long pandemic on employment and income expectations, the imposition of multiple factors has amplified the spillover effect of real estate market risks.

“With the improvement of pandemic conditions and the adjustment of pandemic prevention and control policies, the space and impact of the policies introduced in the early stage has greatly improved. Recently, the recovery of market confidence has accelerated, transaction activity in the real estate market has increased, and the financing environment of the real estate industry, especially high-quality real estate companies, has improved significantly. 

“China’s urbanization is still in the development stage, and the potential for households to improve housing demand is great, while the development model of simultaneous renting and purchasing also has considerable room for development.” (In response to questions at a press conference held by the State Council Information Office in March 2023).