World Economy

Financial appointees in China 'far more important' than political ones for economy, says scholar

Key Points
  • New appointments to China's various financial institutions will signal the country's economic direction, says Cornell professor Eswar Prasad
  • Central bank chief Zhou Xiaochuan's recent warnings about issues in China are important, Prasad said
  • There are concerns that China's economic reforms will stall after Zhou's retirement
This upcoming event could threaten China economy: analyst

Investors interested in China shouldn't be too distracted by who is elevated to the top ranks of the Chinese Communist Party during the ongoing leadership confab, warns a leading China scholar.

Instead, the most important information about the country's economic future will come from the new names in various Chinese financial agencies, according to Eswar Prasad, who was formerly the International Monetary Fund's head for China.

China is now holding a once-every-five-years meeting that will usher a new crop of leaders into the top echelon of the party. President Xi Jinping is expected to extend his term.

But alongside the political reshuffle is the imminent retirement of central banker Zhou Xiaochuan after 15 years at the helm of the People's Bank of China.

"What comes in the weeks and months following [the conclusion of the party congress] in terms of the policy actions that we see, appointments to some of the top agencies related to the financial markets including the PBOC governorship position — those are going to be far more important in setting the tone for macroeconomic policies and financial markets policies in general over the coming years," Prasad, who is now a China scholar and professor at Cornell University, said Friday.

The central bank head position in particular "plays a critical role when one thinks about what happens to the financial markets, exchange rate policy, capital account opening — all of which feeds into thinking about the market orientation of the economy," added Prasad.

Xi expressed support for market reform and private firms on Wednesday at the opening of the party congress, but he also called for a strong government presence in the economy in the same speech.

Prasad warned of how those two "inconsistent notions" could result in moral hazards and contribute to market volatility.

"The reality is that it's very difficult for markets to function well if you have the government overseeing them to the extent that it gets directly involved in them in the guise of stability and control," Prasad told CNBC. "That confuses markets a great deal."

Zhou Xiaochuan, governor of the People's Bank of China, speaks during a press conference at the media center on March 10, 2017 in Beijing, China.
Lintao Zhang | Getty Images

Like many observers, Prasad said that China's implementations of economic and financial reforms have only been gradual despite frequent rhetoric about the importance of making changes.

Some, however, are hoping that a more powerful Xi will be able to push through structural and economic reforms more thoroughly, but there's also the concern that the government could revert to old habits to keep growth high and quell social unease.

Prasad's comments come after Zhou on Thursday warned of a sudden collapse in asset prices.

China's central bank just warned of a sudden collapse in asset prices

Speaking on the sidelines of the conference, Zhou said that corporate debt levels are relatively high, but household debt is rising too quickly, Reuters reported.

That warning follow Zhou's candid public remarks earlier slamming protectionism in China's financial sector and a calling for a return to capital account reforms.

Prasad said recent interviews and comments by Zhou are important in signaling issues in the Chinese economy and financial system, solutions to which may be held back by the new PBOC governor.

"There is a real concern that those could be the reforms, that in the absence of which, you don't get significant market-oriented reforms or the economy going in the right direction," said Prasad.

Zhou was at times controversial during his tenure at the central bank given his support for financial reform, making him a radical thinker in Beijing circles.

Front runners for Zhou's job includes top banking regulator Guo Shuqing and veteran banker Jiang Chaoliang.

— Sophia Yan contributed to this article.