New PBOC Hong Kong Appointment Key to Renminbi

By | February 23, 2016

New Hong Kong Appointment Key to China’s Currency
It is being overlooked in the noise about China but a key appointment was announced this week by the PBOC. Bao Mingyou was named a senior advisor to the Hong Kong Monetary Authority. His role will be to “offer advice and assistance in the areas of financial cooperation between Hong Kong and the mainland, and further develop the yuan businesses in Hong Kong, and promote Hong Kong’s financial services in the mainland.”

The story is a bit more complicated. According to former PBOC officials who alerted us to this development, Bao was handpicked by PBOC Governor Zhou Xiaochuan for the post to fulfill three functions. First, he is to stabilize the international value of the yuan, which has fluctuated due to international trading and perceptions of the China’s economy, much to the embarrassment of the leadership in Beijing. Second, he is to continue to promote the yuan internationally in line with the recent inclusion of the yuan in the IMF’s Special Drawing Rights basket. That inclusion is under threat of being sidelined due to the instability of the currency, the recent devaluation, and the growing problem of capital flight. Since the inclusion has been a strategic program of Xi Jinping and others in the State Council backpedalling would not be acceptable.

Third, and perhaps most interestingly, Bao will act as an “honest broker” in Hong Kong to report the city’s position back to Zhou in Beijing. Bao was handpicked among the PBOC’s thousands of employees for this role. Bao has an MPA from Harvard and studied at the London School of Economics. He headed the PBOC’s New York Bureau and most recently was in London. He is very good at skirting the path between the official pronouncements required of certain factions within the leadership and also performing the technical functions required of his job at the PBOC.

Internal Political Battles
He is stepping into a minefield. There is a conflict between the leftists on the political side and the rightists (pro free-market) on the right. Bao’s job is to strike a path between them while handling Hong Kong’s role as the global face of the currency. The Chinese Liaison office in Hong Kong headed by Zhang Xiaoming has become increasingly heavy handed in its approach to Hong Kong. There was even talk in 2012 about setting up a parallel “Party Organization” as a kind of a shadow cabinet. It is likely that Zhou Xiaochuan does not want to be reliant on a politicized organization for operations or information flow at a sensitive time of increasing globalization of the currency.

Given his international experience, academic training, and clout with the PBOC headquarters, he may be in a good position to help to stabilize the currency in future. We think this is a positive development for China’s management of the renminbi and further reinforces our view that Zhou Xiaochuan is an able official fighting a rearguard battle within the increasing politicized Chinese leadership. However, the importance of capital flight is likely to outweigh any policy changes within the HKMA.