BOK Gov. Has Blitz Meeting with Head of PBC before Yellen’s Visit to China

Bank of Korea Governor Lee Chang-yong had a surprise meeting with Pan Gongsheng, the current Chinese Communist Party Committee Secretary and head of the People's Bank of China (PBC) on July 3 ahead of U.S. Treasury Secretary Janet Yellen’s visit to China. The PBC actively publicized the meeting between Lee and Pan through various channels, including its website and WeChat, a Chinese social media platform. This is a big change in just two months from the PBC’s attitude in May when the Chinese bank sent a minor official, not its head, to a meeting of finance ministers and central bank governors from Korea, China and Japan in Songdo, Incheon, Korea.

The meeting between the heads of the two central banks was unusual in several respects. First, it was notable that Pan rushed to meet with Lee ahead of Yellen’s July 6-9 visit. Lee had planned to travel to Beijing over the weekend to visit the BOK’s Beijing office, but when the PBC learned of the visit, it hurriedly requested the meeting. Some analysts say that the PBC’s leadership, which was replaced recently as China’s economic recovery has faltered, rushed to meet with Lee because they believed that improving bilateral ties with Korea is the most urgent task in order to revive the Chinese economy.

In fact, China’s economic situation has deteriorated sharply since its conflict with the United States surfaced. China’s economy is still expected to grow in the low-to-mid 5 percent range, but its recovery has been slower than expected. In May, China’s production, consumption, and investment growth slowed altogether, impeding a recovery of China’s real economy. China’s exports are faring even worse. They turned to a decline in May, falling 7.5 percent year on year. This was largely due to a slump in China’s exports of most items including information technology (IT), electric and mechanical products, textiles, and apparel. China’s imports also fell, shrinking 4.5 percent, led by semiconductors and high-tech components, as the U.S.-China conflict intensified. In response to the dire economic situation, the PBC drastically cut the loan prime rate (LPR) on July 20 in order to stimulate the Chinese economy by revving up the real estate market.

The Chinese financial market situation is unstable. The yuan’s exchange rate, which stood at 6.70 yuan per U.S. dollar on Jan. 13, has gradually weakened since then. It passed the 7 yuan mark in May for the first time in 2023 and approached the psychological threshold of 7.25 yuan in late June. On July 4, it ended trading at 7.23 yuan per dollar. The yuan’s year-to-date depreciation exceeded 7 percent, prompting authorities to intervene in the market, but fears of foreign capital flight remain. From February 2022 to April 2023, foreigners sold 935 billion yuan (US$129 billion) worth of bonds in China’s bond market, according to the International Finance Center. Foreigners held 8.3 percent of Chinese bonds, the lowest since August 2019. Analysts say the outflow was driven not only by the expectation of a weaker yuan, but also by concerns about fundamentals such as the U.S.-China conflicts.

Analysts say that Pan, one of China’s leading foreign exchange experts with international networks, came forward with the goal of stabilizing the Chinese foreign exchange and financial markets. He did his post-doctoral research at Cambridge University in the United Kingdom and was a research fellow at Harvard University in the United States. Market analysts expect Pan to be more active in intervening in the Chinese foreign exchange market.

Lee’s international experience also makes him Pan’s ideal partner to discuss recent economic and financial developments with. In particular, Lee’s eight-year tenure as head of the International Monetary Fund’s Asia-Pacific Department gave him an in-depth look at the Chinese economy. As governor of the BOK, Lee is in close contact with Korean government officials, so he may convey the Korean government’s intention to restore bilateral ties.

Some analysts believe that Korea’s increasingly close cooperation with the United States in high-tech industries such as semiconductors and batteries has given the Chinese authorities a sense of urgency. “China wants the smooth operation of Korean chipmakers’ factories in its country because Chinese companies want to receive the semiconductors from those factories in time,” said Kang Sam-mo, a professor of economics at Dongguk University in Seoul. “If relationships between China and Korea take a turn for the worse and Korean chipmakers reduce their semiconductor production in China due to increased pressure from the United States, it will deal a huge blow to the Chinese economy. China has no choice but to adopt the dual strategy of both threatening and placating Korea,” Kang added.