China Adds Lou to Economic Team as Nomura Sees Crisis Risk

Chinese Vice Premier Zhang Gaoli & Premier Li Keqiang
New Chinese Premier Li Keqiang (R) with newly-elected most senior Vice Premier Zhang Gaoli (L) during Keqiang's first press conference at the Great Hall of the People in Beijing. Photographer: Lintao Zhang/Getty Images

China filled out Premier Li Keqiang’s economic team, installing sovereign-wealth head Lou Jiwei as finance minister and retaining Zhou Xiaochuan as central bank chief as a once-a-decade power handover concluded.

Gao Hucheng, 61, will be commerce minister after the National People’s Congress approved his appointment in a vote in Beijing yesterday. Xu Shaoshi, 61, will head the National Development and Reform Commission, the economic planning agency.

The leadership lineup under Li, who today urged paring back the government’s role in the economy, is a mix of “activist reformers” such as Zhou and Lou, and more cautious officials, according to Yukon Huang, a former World Bank country head for China. At stake is the speed of policy moves to deepen a shift toward free markets and limit a slide in growth, as Nomura Holdings Inc. warns of mounting risks of a financial crisis amid increases in credit and property prices.

“The short-term challenge is how to suck the oxygen out of shadow financing and the property market without sucking the oxygen out of the economy,” said Alistair Thornton, a Beijing-based economist at research company IHS Inc. “Long-term, it’s about how to reduce the state’s hold over the economy, which increasingly is jeopardizing the sustainability of growth.”

Speaking at a press briefing in Beijing, Li said the government needs to tackle vested interests and take the revolutionary step of cutting its own power. He added that growth of 7.5 percent per year is needed to meet government goals, which include doubling per-capita income by 2020.

Vice Premiers

Zhang Gaoli, appointed as the most senior vice premier, will be among officials serving as a counter-balance to those pushing for change, said Huang, a senior associate at the Carnegie Endowment for International Peace.

Politburo members Wang Yang, who’s the former Communist Party secretary of Guangdong, Liu Yandong and former state planner Ma Kai also became vice premiers. One of the officials at that level, ranked higher than ministry heads, is likely to serve as counterpart to U.S. Treasury Secretary Jacob J. Lew, due to visit Beijing on March 19 and 20.

The world’s second-biggest economy faces rising risks because of excessive credit, elevated property prices, declines in the labor force and limited productivity gains, according to a March 15 report from Nomura. A slowdown in “reform momentum” after China joined the World Trade Organization in 2001 is holding the nation back, the investment bank said.

Monetary Policy

The government has avoided difficult changes “such as moving to a fully market-based monetary policy framework and opening up the service sector that is monopolized by the state-owned enterprises,” said Zhang Zhiwei, chief China economist at Nomura in Hong Kong. He sees a slowdown to 7.3 percent growth in the second half of 2013 as officials tighten policies to head off any crisis.

The Shanghai Composite Index is down more than 6 percent from this year’s Feb. 6 peak on concerns that monetary tightening and property curbs will slow expansion. The economy grew 7.8 percent last year, the least since 1999.

Zhou’s role may signal that the new Communist Party leadership will press on with loosening controls on interest rates and expanding international use of the yuan. Li became premier on March 15, while Xi Jinping replaced Hu Jintao as president on March 14.

Wealth Fund

Lou, 62, may be the new appointee with the highest international profile, after overseeing purchases including a stake in Morgan Stanley as founding chairman of sovereign wealth fund China Investment Corp. In January this year, he said the fund was trying to cut an “over-reliance on U.S. debt.” He also predicted that loose monetary policies would persist, saying that the so-called QE3 round of easing in the U.S. would be followed by “QE infinite.”

“Lou will enhance China’s influence in multilateral institutions,” said David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department, who’s now an analyst in Los Angeles at TCW Group Inc., which oversees about $138 billion. “He is well known and well regarded by the international financial community. He brings a practical, rather than an ideological, approach to financial diplomacy.”

At home, Lou will face challenges including local governments’ debt burdens.

Command Economy

Xu, the head of the NDRC, was previously the minister of land and resources, charged with defending a so-called “red line” of 1.8 billion mu, or 120 million hectares, of arable land. The NDRC is a planning body with origins in China’s command economy, before Deng Xiaoping drove the nation’s opening up from the late 1970s. It gained extra responsibilities in changes approved March 14, adding power-market regulation to its National Energy Administration and taking over population strategy.

Gao, the commerce chief, was previously a vice minister and China’s international trade representative, serving at the ministry under Bo Xilai, the disgraced former Chongqing party secretary, and then Chen Deming. Gao has ties with Africa, after studying in the 1970s in Zaire, now the Democratic Republic of the Congo.

One of the most important decisions for U.S.-Chinese ties may be the choice of the vice premier to serve as counterpart to U.S. Treasury secretary, a role previously held by Wang Qishan. That relationship was “critical in steering the bilateral relationship through the financial crisis,” when Henry Paulson and then Timothy F. Geithner represented the U.S., said Loevinger.

“If the vice premiers for finance and international trade and investment are split as they were during the first term of the Hu Jintao administration -- which appears likely -- it will represent a challenge for Secretary Lew as he heads to Beijing,” Loevinger said. “He is likely to only get one counterpart to build that critical relationship.”

— With assistance by Kevin Hamlin

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