China’s new central bank governor will have to deal with massive debt and an ambitious economic agenda

The Chinese government has appointed a new head of its central bank. Yi Gang, currently the deputy governor of the People’s Bank of China, will take over the leadership from Zhou Xiaochuan, who had been in the position since 2002.

As China’s central bank oversees the stability of the world’s second-largest economy and the world’s largest pile of foreign reserves, this is a change the global economy is watching closely.

A US-trained economist, Yi received his doctorate in economics from the University of Illinois in 1986. He was a professor at Peking University in China following various academic positions in the US, before joining China’s central bank in 1997. Yi is known in academia for his expertise on inflation and price instability.

Yi will also work to defuse the debt bomb that has been lurking behind a series of alarming statistics of the Chinese economy. In particular, China’s total debt has almost doubled between 2008 and mid-2017, to 256% of GDP as the economy slowed down from double-digit growth to a mere 6%.

A distressed financial system could trigger a systemic economic collapse. To reign in this possibility, Yi will have to work closely with authorities in the State Council, China’s cabinet, to contain the risks to a manageable scale.

The bank will have to walk a fine line here. It must contain the shadow banking sector, which is largely beyond the radar of the authorities. At the same time it has to make sure such tightening does not choke financial innovations embodied by the burgeoning internet finance and fintech.

Equally, if not more important, the financial reforms must be taken to facilitate China’s grand economic transition. In the short to medium term, this entails a further aligning of China’s interest rates to China’s market levels.

They also need to bring its exchange rates in line with international market levels, open its financial markets in a gradual and orderly fashion, and push for the use of the Chinese currency in the global market. This is an ambitious project initiated by Zhou with the goal of seeing the renminbi’s international status on par with the greenback.

A more open and liberal financial system in China is of course good news for the world economy as well because central banks need to work together to address increasingly divergent policy priorities among advanced and emerging economies.

Whether or not Yi becomes the next “Mr RMB” (as Zhou is often dubbed), he needs to be the “Dr Reformer” at this critical stage of both the Chinese and global economy.