The Harvard-Educated Economist Who Could Tackle China’s Debt Mess

Updated on
  • Liu He seen as ‘the brain’ behind supply-side reform efforts
  • Economist is viewed as a combination of Summers and Bernanke

Liu He, a key adviser to Chinese President Xi Jinping known for guiding economic policy behind the scenes, appears destined to occupy more of the spotlight.

The 65-year-old Cultural Revolution survivor turned Harvard-educated technocrat rose to prominence by doing a series of crucial jobs quietly. Now, amid a flurry of reforms including clearing the way for foreigners to control domestic banks, analysts say the stage is set for him to become Xi’s key lieutenant tasked with preventing a financial meltdown.

Liu He

Photographer: Nelson Ching/Bloomberg

On Wednesday, it was announced that a new committee charged with corralling China’s disparate financial regulators into concerted action was led by 71-year-old Vice Premier Ma Kai. According to Communist Party conventions, Ma is due to retire soon, leaving Liu -- freshly appointed to the Politburo -- the obvious choice for the role.

"Liu will be like a Chinese version combining both Larry Summers and Ben Bernanke, plus the chairman of the president’s economic council," according to Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "He will not only oversee overall financial markets including monetary policy and financial supervision, but also the relevant fiscal and reform policy."

Shen described Liu as "the brain" behind supply-side reform efforts to cut overcapacity and boost the role of market forces and said he’ll be a key figure in shaping China’s economic blueprint for the next five years.

A fax to the People’s Bank of China, which hosts the executive office of the State Council Financial Stability and Development Committee, went unanswered Thursday.

Debt Challenge

With an economy-wide debt level approaching three times annual output, comprised mostly of a complex web of corporate and household borrowing, China must ease its addiction to credit without creating a collapse in asset values that would seriously hamper the economy.

At the same time, China’s financial system is constantly being overhauled and opened up. On Thursday, the removal of foreign ownership limits on domestic banks signaled a further step toward a market economy.

Read more on the opening of banks to foreign control

A member of Xi’s inner circle, Liu has played a behind-the-scenes role as director of the Communist Party’s general office of the Central Leading Small Group for Financial and Economic Affairs, which is chaired by Xi himself. He’s also been vice chairman of the National Development and Reform Commission, the government’s top economic planning body.

"It’s clear that Liu He is going to be powerful in setting economic strategy, whether as vice premier or whatever title he is given," said James Stent, author of "China’s Banking Transformation: The Untold Story" who spent more than a decade serving on the boards of Chinese lenders.

Referencing a book that Liu wrote comparing the 1929 and 2008 crises in the U.S., Stent says he understands financial crises well.

"He will move to deal with the problems in the system, but in a way that does not shock the system unnecessarily," he said.

While Liu has avoided the spotlight, many economists regard him as the voice behind an anonymous missive on debt published in the People’s Daily in May 2016. The Communist Party newspaper published the comments from an unnamed “authoritative person,” who said China must face up to its nonperforming loans and other risks associated with soaring debt.

Authoritative Person

"It’s widely understood in the industry Liu is the person," said Xia Chun, a visiting professor at the University of Hong Kong. "His comments on the economy are accurate and constructive. What’s even more commendable is that he never shies away from the problems and difficulties in China’s economy."

In China’s opaque policy world, there’s no guarantee Liu will be appointed to lead the new oversight body. But Xia, like Mizuho’s Shen, says he’s likely to lead the panel.

Last December, when Xi convened the party’s annual Central Economic Work Conference to review progress and map out the plan for 2017, top policy makers emerged saying that they would prioritize preventing and controlling financial risk to avoid asset bubbles. They also set out a "prudent and neutral" monetary policy, which top officials have echoed this year.

Liu entered Beijing’s Renmin University in the late 1970s, earning a degree in industrial economy, according to a biography published last month by the official Xinhua News Agency. He studied business at Seton Hall University in South Orange, New Jersey, from 1992 to 1993 and the following year began studies at Harvard’s Kennedy School of Government, earning a master’s degree in public administration in 1995.

A former soldier and factory worker who was sent to the northeast in the midst of the country’s 1966-1976 Cultural Revolution, Liu helped draft the five-year plans that underpinned the economy. Liu spent much of his career in the State Planning Commission, the predecessor of the NDRC that formerly set prices for everything from bicycles to grain.

Global Role

The economist has played an important role in the relationship between the two largest economies. As global markets cratered during the U.S. financial crisis, then-Treasury Secretary Timothy Geithner and National Economic Council Director Summers separately made time for Liu, a link to top leaders in Beijing, Bloomberg News reported at the time.

While Liu can be a smart and thoughtful expert, he ultimately remains a servant of Xi, according to George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG.

"That’s the rub," Magnus said. "Xi’s controlling and commanding role at the apex of the strengthened party brings a different nuance to economic and financial decision making. Everything of substance must now go to and through Xi, regardless of the leanings and preferences of people like Liu. He’ll certainly continue to give his boss the benefit of his opinions and advice, but implementation of anything has to pass muster with the president."

— With assistance by Keith Zhai, Yinan Zhao, and Enda Curran

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE