Yi Gang to Head China’s Central Bank

Yi Gang, an American-trained economist who taught at the University of Indiana, will take over as governor of the People’s Bank of China. Since 2008, he has been deputy governor under Zhou Xiaochuan, who became head of the bank in 2002. The unexpected appointment of Mr. Yi will provide continuity at the PBOC and lend credibility to the pledge for financial liberalization.

Following his appointment, Yi Gang declared: “The main task is that we should implement prudent monetary policy, push forward the reform and opening-up of the financial sector, and maintain the stability of the entire financial sector.”

In November 2007, Yi Gang spoke at Cato’s Annual Monetary Conference, and his speech, “Renminbi Exchange Rates and Relevant Institutional Factors,” was published in the Spring/Summer 2008 Cato Journal, which also included an article by Fed Chairman Ben Bernanke. That special issue of the CJ raised important questions about the types of monetary regimes that best protect the value and stability of money while promoting economic freedom.

Yi Gang speaking at Cato’s Annual Monetary Conference in 2007

In his article, Yi Gang, then deputy governor of the PBOC, gave a detailed view of the evolution of China’s exchange rate regime and argued that real reform takes time, so the West should be patient. He concluded:

The RMB exchange rate is an economic issue. The best way to bring about an equilibrium exchange rate is further reform. Constructive 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 therefore be patient as China makes its way toward a full-pledged foreign exchange market [Yi Gang 2008: 195–96].

As governor, Yi Gang will work closely with Liu He, the newly appointed “economic czar” and vice premier, who is also in favor of economic reform.  By making these appointments, President Xi Jinping is signaling that he intends to address structural problems in China’s economic system. The question is whether he can do so while maintaining an iron grip on political power and preventing a free market in ideas.

Cracking down on dissent will be the job of Yang Xiaodu, who has been appointed to head the new National Supervisory Commission (a super “anti-corruption” body), designed to ensure that officials and public-sector workers adhere to the Chinese Communist Party line.   

President Trump and his advisors should listen carefully to the PBOC’s new governor and Mr. Liu and work with them to help move China toward a more liberal trading regime, including a larger scope for trade in ideas as well as in goods and services.

Meanwhile, President Xi, who now has absolute power for life, should remember the words of Lao Tzu:  “The more restrictions and limitations there are, the more impoverished men will be. . . . The more rules and precepts are enforced, the more bandits and crooks will be produced. Hence, we have the words of the wise [sage or ruler]: Through my non-action, men are spontaneously transformed. Through my quiescence, men spontaneously become tranquil. Through my non-interfering, men spontaneously increase their wealth” [Chap. 57, Tao Te Ching, translated by Chang Chung-yuan].