China replaces finance minister Lou Jiwei with Xiao Jie

Lou Jiwei Photo: Getty Images 

Chinese Finance Minister Lou Jiwei, who has been struggling in recent years to tackle the country's huge debt problems, is stepping down as he approaches retirement age.

He will be replaced by Xiao Jie, a former tax bureau chief who has previously suggested that the government has room to raise personal taxes.

The announcement was made by the Standing Committee of the National People's Congress (NPC) on Monday.

Alongside the People's Bank of China governor Zhou Xiaochuan, Lou was regarded as one of the government's most competent economic officials. He tackled a number of difficult reforms.

With a key party congress a year away, Beijing has recently made several ministerial appointments. New state security and civil affairs ministers were also announced on Monday.

Lou, who turns 66 next month, is unlikely to be reappointed when China's next government formally takes office in March 2018.

"It's normal for cadres at ministerial level to step down at his age," said Qiao Mu, a Beijing-based academic. "The party is making personnel adjustments ahead of (next year's) congress."

But the sudden departure of such a prominent figure still surprised many analysts.

Eswar Prasad, a professor at New York's Cornell University and former head of the International Monetary Fund's China division, noted that Lou had played a key role in President Xi Jinping's larger effort to rebalance China's economy away from its traditional reliance on investment-led growth.

"Fiscal reforms are a key component of China's rebalancing strategy and Lou had both the prowess and technical knowledge to push forward some of those reforms in the face of tough political opposition," Prasad said.

Lou is known for his efforts to tidy up the country's fragmented fiscal system and to clean up debts incurred directly or indirectly by local governments.

The last major policy announcement under Lou came on Friday, when the ministry said that the government would not be liable for debts incurred by financing vehicles set up by local authorities.

China has swapped trillions of yuan worth of local government debts into bonds under Lou's tenure. About 7.2 trillion yuan of them had been replaced by the end of September, though more, especially implicit liabilities, needed to be tackled. The official figure for total local debt was 16 trillion yuan by last year, with another 1.18 trillion yuan to be added this year.

Lou's legacy also includes value added tax reform, the biggest tax-regime change in two decades, which has generally lowered the corporate tax burden.

Lou is also one of the Chinese government's most pugnacious and articulate voices on the international stage. He has publicly challenged Donald Trump's trade policies and rejected criticism of China's industrial policies by his US counterpart, Jack Lew.

In an exchange with Lew in June over alleged market distortions blamed on cheap Chinese steel exports, Lou argued that privately owned mills accounted for half of domestic output and did "not take direction" from the central government.

New finance minister faces fiscal fix

The new finance minister Xiao, 59, previously a senior aide to Premier Li Keqiang, inherits from his reformist predecessor a plan to rein in local authorities' profligate ways without derailing growth in the world's No. 2 economy.

Xiao now takes up the baton at a time when monetary policy has switched to neutral, leaving the economy more reliant on fiscal support.

"Xiao comes in at a critical moment for China's fiscal reform," said Jin Dongsheng, a former researcher at an institute under the State Administration of Taxation. "Some may worry if he is able to carry forward the reforms left behind by his predecessor. I think he is."

Remaining undone from Lou's agenda is a plan approved in August by the State Council to reform the allocation of fiscal revenues between the central and local governments.

The document, in line with ideas put forward in Lou's 2013 book "Rethinking of Intergovernmental Fiscal Relations in China," says the central government should take over from local governments the responsibility for funding things such as medical care and pensions. That would reduce the financial burden on local governments and help solve at root the forces that drove provincial authorities to rely on land sales as a source of funding.

In a 2005 speech, Xiao suggested fiscal reform could be used as a tool to achieve better equality among regions, adding that business, personal and value-added taxes should be priority areas for reform.

At the same time as he grapples with domestic challenges, he'll have to forge a relationship with what's likely soon to be a new US Treasury secretary in a global environment where protectionist sentiment is on the rise.

Lou's retirement was widely expected and will have little impact on fiscal policy, according to Liu Li-gang, chief China economist at Citigroup in Hong Kong. "Fiscal policy is often decided by the State Council, while the Ministry of Finance is often viewed as a policy executioner," he wrote in a note. Xiao "will be even less likely to change this practice."
 


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