For the thousands of China watchers, economists, executives and diplomats gathered at the World Economic Forum in the Swiss hamlet of Davos last month, Liu He was likely to have been a star attraction. Liu, chief economic adviser to the Chinese government and one of the 25 most powerful people in the Politburo, was there to deliver a speech on the way forward for China’s economic programme over the next five years.
He did not disappoint. To a roomful of attendees, Liu promised in Chinese that some reforms “will exceed the expectations of the international community”.
At a meeting of the country’s parliament and political advisory body next month, Liu, a 66-year-old Beijing native, is likely to be promoted to become one of four vice premiers working nominally under Premier Li Keqiang.
Liu, who attended Harvard’s Kennedy School and Seton Hall University in New Jersey, will be one of the country’s most powerful vice-premiers in two decades, according to analysts, scholars and economists who know him.
The Chinese president may delegate much of China’s economic management to Liu’s team, “largely bypassing the premier”, said Steve Tsang, director of the SOAS China Institute in London and author of China in the Xi Jinping Era. “Liu is unlikely to put forth any plan which he thinks President Xi Jinping will not approve, or like.”
Liu will continue to direct the Office of the Central Leading Group on Financial and Economic Affairs – its address is a Beijing postbox – which functions like the US government’s National Economic Council. According to a source familiar with government operations, he will also chair the Financial Stability and Development Commission, a new agency that supersedes all financial regulators, responsible for overseeing regulation and reducing “rhino risks”, as highly leveraged corporate borrowers are called.
His team will comprise economic technocrats drawn from China’s banking and financial system, appointed to various senior positions to oversee the country’s central bank, lenders, as well as the stockbroking and insurance industries.
While the final appointments will not be known until parliament meets from March 3 until March 15, several names have already been touted in Beijing’s policymaking circles as likely candidates.
Among them are the current bank regulator Guo Shuqing, securities regulator Liu Shiyu, deputy central bank governor Yi Gang, state planning director He Lifeng, state assets custodian Xiao Yaqing and Ding Xuedong, deputy secretary general of the State Council.
With five doctorates between the six, every member of this elite team of econocrats has spent the most part of their careers managing either a state entity, a bank or a financial services company. At least three among them speak English fluently.
“The team being put together looks like a strong one,” Tsang said. “They should be in a position to put in place a reform programme that seeks to rebalance the economy and reduce risk at the same time.”
Liu spent four years at two American universities, an experience that puts him in a unique position to deal with a US government that has turned increasingly more hostile towards Beijing, with Donald Trump’s administration labelling China a “strategic competitor”. Trump has also been vacillating between his apparent fondness for Xi – he called the Chinese president a “very special man” after being flattered and wooed during his November 2017 visit to China – and his pre-election promise to slap tariffs on Chinese exports.
The biggest economic challenges confronting Liu’s team will be domestic. China’s breakneck growth – at an average clip of 9.8 per cent every quarter since March 1992, when data became available – has turned its economy into the world’s second-largest. But the quarterly growth pace has slowed to an average of 7.2 per cent in the past five years under the watch of Xi and Li, a situation the government called the “new normal”.
Adding to the litany of economic challenges is a rapidly ageing population and a birth rate that is too low to replenish the country’s workforce, a widening wealth gap especially between the five biggest cities and the remainder of the country, mounting debt among local provincial governments, runaway home prices and rampant financial irregularities – none of which can be resolved in the short term.
“No one should think this is an easy job, but it has been made harder by China’s unwillingness to tackle some of these issues years ago,” said Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise”, who added that the first test would be how China reins in debt. The team faces a “far more complex” financial system than it ever was and “the days of easy growth are over”, he said.
One in four of the mainland population will be 60 years or older by 2030, from the current 16.7 per cent, according to census data. That will exert pressures on the pension system, and cause wages to soar because the workforce cannot be replenished quickly enough to meet demand.
Debt ballooned over a decade to 163.4 per cent of economic output at the end of 2017. That compares with 73.3 per cent in the US and 53.8 per cent in Germany, according to the Bank of International Settlements, enough of a major concern for Moody’s and S&P to downgrade China’s sovereign credit rating for the first time in two decades.
“Indebted, old countries do not grow,” said Derek Scissors, a resident scholar at the American Enterprise Institute and chief economist at China Beige Book, a New York-based research group. “The next five years will probably be OK, but the economy is headed in the wrong direction.”
Also significant is next month’s retirement of Zhou Xiaochuan, the septuagenarian former chemical engineer and China’s central bank governor for 15 years through the first term of Xi’s presidency.
The central bank works as the government’s policy organ, without a charter of independence, so the governor is not so much a formulator of monetary policy as its implementer. Zhou, with a penchant for delivering hour-long, off-the-cuff lectures on macroeconomics – in either Mandarin or English – is China’s longest serving central banker, and the most authoritative and articulate explainer of the country’s monetary policy.
At least three of the six potential members of Liu’s elite team worked under Zhou – Guo Shuqing as the central bank’s foreign exchange administrator, Yi Gang after he joined the People’s Bank of China in 2004 as assistant governor, while Liu Shiyu was Zhou’s chief of staff in 2002, and later assistant governor.
Guo, 62, is said to be the front runner as the incoming governor of the People’s Bank of China. His resume includes provincial governments in Guizhou and Shandong, heading the regulatory bodies for stocks and banks, and four years as enforcer of China’s foreign exchange controls.
Guo likes to get things done quickly without much consideration for interest groups, according to China Banking Regulatory Commission officials, who declined to give their names.
That style may resonate with Liu. When Communist Party elders cited the 2008 global financial crisis as proof that China’s economic reforms since 1978 had gone awry, Liu dismissed people with those views as “a small minority”, according to a cable by former US ambassador to China Clark “Sandy” Randt that was disclosed by WikiLeaks.
This working style may also adhere to President Xi’s priorities, which are to ensure political stability whilst untangling the complex web of woes entrapping China’s economy, said American Enterprise Institute’s Scissors.
“Xi could initiate bold changes, but he has made his preference clear – state control is more valuable than productivity,” Scissors said. “His government does not appear to have an economic agenda other than deal with risks created by [his predecessor],” he said.
The Chinese leadership outlined three key tasks over the next three years during its annual Central Economic Work Conference in December: risk prevention, poverty reduction and pollution control.
The results of pollution control are already apparent. Boilers and heating systems in Hebei province, which surrounds Beijing, were forced to switch to natural gas from coal to reduce the smog that cloaks the Chinese capital every winter, even as millions of rural residents were caught unprepared for the conversion. The result was to transform Beijing from one of China’s most polluted cities to one with the best air quality.
Similarly, in banking and finance, regulators worked in concert to reduce risk on the financial system. Guo as bank regulator uncovered 59,700 cases of irregularities among Chinese lenders involving 17.7 trillion yuan (US$2.7 trillion), and slapped 1,877 banks with 2.9 billion yuan in fines. Liu Shiyu, as securities regulator, gave a series of well-publicised tongue lashings to listed companies engaged in leveraged buyouts, while the insurance regulator was fired for allowing insurance policies to be used as war chests to finance takeovers.
In Liu He, China has an experienced hand at dealing with the risks accumulated over a decade of financial innovation and post-crisis economic stimulus. In 2012 research titled Comparative Study on the Two Global Crisis, he laid out the steps for dealing with risks: set a bottom line; prepare for the worst possible scenario; and maximise national interest by grasping strategic opportunities. Three years later he called for the creation of a regulatory regime with teeth, which paved the way for crackdowns on debt, including placing private conglomerates like Anbang Group, Fosun Group, HNA Group and Wanda Group under scrutiny.
“Reform mindset and approaches are necessary to solve long-term structural problems while surgeries are needed to tackle short-term risk,” Liu wrote in the Chinese preface of Financial Supervision in the 21st Century, a book compiled by the Dutch central bank to reflect on the 2008 global financial crisis.
Strategies such as the Belt and Road Initiative, supply-side reforms, the shift to consumption-driven growth and China’s rush to defend globalisation can trace their roots to the 2012 research project led by Liu.
“The world has entered a long process of inadequate demand and deleveraging after the  crisis. Our strategic opportunities are mainly the huge lift of domestic market to drive a global economic recovery, acquisition of technologies of developed countries and infrastructure investment,” according to Comparative Study on the Two Global Crisis.
Tsang said: “He will have to steer a course between keeping the party in the driving seat and making the private sector vibrant. Only time will tell if he can square this circle and for how long.”