China’s $40 Trillion Man Has the Toughest Job in Global Finance

Guo Shuqing
Two months into his tenure as China’s top banking regulator, Guo Shuqing did something his staffers had never witnessed from a senior Communist Party leader. Speaking in Beijing to officials and industry executives from across the country, he pledged to resign if he failed to snuff out the excesses that had been accumulating in China’s $40 trillion banking system for almost a decade.
“This is a leader’s responsibility,” Guo said, according to people familiar with the April 2017 speech who asked not to be named discussing an internal matter.
His comments jolted the audience. Not only is it extremely rare for a high-ranking Chinese official to admit the possibility of defeat, but those listening also understood the enormity of Guo’s task. As steward of the world’s largest banking system—it’s twice the size of the U.S.’s—the 63-year-old arguably has the hardest job in global finance. And it’s getting more difficult by the day. China faces its most uncertain economic environment since the global recession a decade ago, a state of affairs further complicated by the civil unrest in Hong Kong.
Guo’s priorities—keeping China’s financial system stable and chipping away at the implicit state guarantees that underpin everything from asset-management products to bank deposits—are maddeningly contradictory. To create a more sustainable system where financial risk and return go hand in hand, he must convince investors, lenders, and local governments that Beijing won’t come to the rescue when asset prices fall or borrowers default. But removing the government backstop could trigger a “rapid and chaotic” repricing of risk that results in exactly the kind of crisis Guo is trying to prevent, says Michael Pettis, a finance professor at Peking University and former banker at Bear Stearns Cos.

Walking that tightrope would be difficult in the best of times, but Guo is doing it with a trade war and a record-high debt burden hanging over China’s $13 trillion economy. What’s more, he may need to get it done by sometime in 2021; officials at his level typically retire at 65, though there have been exceptions.
To the dismay of China bears everywhere, Guo seems to be pulling off the balancing act. Since becoming chairman of the China Banking Regulatory Commission in early 2017, he’s published sweeping rules that ban implicit guarantees on $14 trillion of asset-management products, shuttered thousands of struggling peer-to-peer lenders, allowed local companies to default on their debt at a record pace, and imposed losses on a troubled bank’s creditors for the first time since at least 1998.
Although his unprecedented campaign to rein in moral hazard has caused bouts of financial turbulence and contributed to the Chinese economy’s deepest slowdown in decades, the country has yet to experience anything approaching a crisis. China’s gross domestic product rose 6% in the third quarter, slightly below estimates but still within the government’s target range. Of course, if growth takes a dramatic turn for the worse, Guo will have much less room to maneuver. But for now, the outlook for further reforms looks positive. Investors, policymakers, and academics who’ve worked with Guo say his financial overhaul is far from over.
“There is still a long way to go,” says David Loevinger, a managing director of emerging markets at TCW Group Inc. and former senior coordinator for China affairs at the U.S. Department of the Treasury. Loevinger, during his stint at the Treasury from 2006 to 2012, met with Guo, a fluent English speaker, several times. He describes Guo as “very disciplined and thoughtful,” with a “deep understanding of China’s financial challenges.” At the same time, Loevinger says, Guo recognized “that you couldn’t always take a cookie-cutter approach and drop Western regulatory systems into China’s financial system.”
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Guo was born in China’s remote Inner Mongolia autonomous region in 1956, only a few years before Mao Zedong embarked on the Great Leap Forward, the disastrous industrialization push that led to one of the greatest famines in history. He spent his formative years sowing crops as part of a government program that sent millions of young Chinese to rural areas in the 1970s. After the chaos of Mao’s reign subsided, Guo studied philosophy at Nankai University in Tianjin and received a master’s degree in Marxist and Leninist theory at the Chinese Academy of Social Sciences.
Guo, who declined to be interviewed for this story, knew he wanted to be a reformer from an early age. In 1984 he published one of his earliest articles, a 35,000-word opus titled “Investigations on Reforming the Chinese Economy,” and sent it, unsolicited, to the State Council, China’s cabinet, in hopes that top policymakers would learn from its recommendations. He attended the University of Oxford as a visiting scholar two years later, after which he embarked on a tour of Eastern Europe that left him shocked by the bleakness of the region’s economies as Soviet communism faltered. He returned to China more convinced than ever about the need for change, including measures to loosen the grip of local governments on the economy, according to a memoir of his travels written in 1987.
Guo landed his first big government job at the State Planning Commission, a predecessor to the National Development and Reform Commission, and climbed steadily through the ranks of Chinese officialdom to become one of its most prominent pro-market reformers. His résumé includes senior positions at the central bank, the securities regulator, China’s second-biggest state bank, and the governors’ offices of Guizhou and Shandong provinces.
As head of the State Administration of Foreign Exchange, he liberalized cross-border capital flows and made China’s currency more flexible. “Not only does he see the right direction, he also matches it with political reality to make reforms truly workable,” says Guan Tao, who worked under Guo as head of international payments at SAFE in the early 2000s and is now managing director at the China Society for Finance and Banking.
People who know Guo, including some who didn’t want to be named when talking about a senior member of government, describe him as one of the few high-ranking Chinese officials with both a strong scholarly bent and a knack for navigating the country’s tricky politics. Guo “was never shy about disagreeing,” Loevinger says. “But always in a very thoughtful way.”
Married, with a daughter, Guo has written at least 300 essays and 14 or more books. During his rare downtime, he’s said to enjoy listening to classical music and discussing topics such as the role of exchange rates in China-U.S. trade relations. Andrew Sheng, an international adviser to the China Banking and Insurance Regulatory Commission, who’s known Guo for more than 30 years, summed him up this way: “He can think, he can listen, and he can act.”
Guo’s political savvy was evident in March 2018 when he won a major vote of confidence from Chinese President Xi Jinping and Vice Premier Liu He, Xi’s top economic adviser. They merged the banking and insurance regulators and named Guo as chairman of the combined China Banking and Insurance Regulatory Commission, or CBIRC. He also became party secretary of the central bank, the People’s Bank of China. Altogether, this arrangement gave Guo more power than any of his predecessors.
He hasn’t been shy about using it. Among his biggest targets has been China’s sprawling shadow-banking system, a collection of loosely regulated lenders, fund managers, and other financial institutions that ballooned in recent years thanks in large part to the widespread belief that the government wouldn’t let them go bust. The fixed-return, high-yield asset-management products that form the backbone of this financial network have lured trillions of dollars from Chinese savers, most of whom assume that they’ll get bailed out if the products face losses.
Guo has steadily chipped away at that assumption by allowing shadow-banking products to fail, particularly in the peer-to-peer lending sector where standards were especially lax. New rules governing wealth-management products—set to take effect at the end of 2020—would shift the industry away from a fixed-return model to something more akin to mutual funds in the U.S., where investors bear the risk of fluctuating market prices and can track their funds’ net-asset value every day.
Guo is “trying to diffuse any potential systematic financial risks by letting the market set the appropriate price for risk,” says Zhu Ning, a professor at Shanghai Advanced Institute of Finance, who advises the central bank and other economy-related ministries and has written a book on implicit guarantees.

Guo has focused much of his recent attention on tackling problems at the hundreds of small banks that dot China. In May he oversaw a dramatic break with precedent by seizing control of Baoshang Bank Co., a troubled lender from Inner Mongolia, and imposing losses on some of its creditors. The episode triggered a wholesale repricing of credit risk for all but the largest Chinese banks. Proponents of this kind of policing say it will put the financial system on a more sustainable path by forcing markets to differentiate between weak and strong lenders.
Although Guo’s enforcement action was widely applauded by China watchers, some economists and traders criticized the opaque way in which it was handled. In the days surrounding the Baoshang Bank seizure, the CBIRC and the central bank didn’t communicate clearly what was happening, causing chaos in interbank markets and raising questions about how thoroughly policymakers had planned for the repercussions.
As of mid-November, it was still unclear to what degree Baoshang will serve as a blueprint for China’s troubled banks. The issue is likely to flare again: In July, UBS Group AG estimated that the Chinese lenders it monitors faced a capital shortfall of $349 billion.
The government’s threshold for financial-market pain may be too low to allow Guo to enact major reforms, says Victor Shih, a professor of political economy at the University of California at San Diego. At Baoshang, for example, even though some creditors suffered losses, 99.98% of them were eventually made whole by the government. Policymakers have subsequently orchestrated full bailouts for several of Baoshang’s embattled peers. “He will always come down on the side of ensuring stability,” Shih says.
Shih says Guo’s balancing act doesn’t just limit “big moves on reform”; it also holds back new ways of doing things. “He has tackled an issue that was deemed very important by the leadership,” Shih says, “and that was financial risk. Especially in shadow banking. But in the process of doing so, he in effect stifled what was previously a very vibrant and risky part of China’s financial system, which is shadow banking and financial innovation.”
Investors seeking reform in the way China manages risk are pushing for a number of changes. They include a clear-cut mechanism for allowing weak financial institutions to fail, more aggressive measures to detect and dispose of bad loans on banks’ balance sheets, increased incentives for big banks to boost lending to nonstate companies, and continued efforts to level the playing field for foreign financial companies.
How Guo handles the rollout of China’s new rules on asset-management products will be a major test of his mettle. Some of the biggest Chinese banks are already lobbying regulators to delay implementation as lenders struggle to make existing products compliant and bring off-balance sheet loans onto their books, according to people familiar with the matter. In an unusually pointed speech in September, Xiao Gang, the former head of China’s securities regulator who’s an adviser to the government, said the 2020 deadline for compliance was “unrealistic and unfeasible.”
Guo’s success may hinge on his ability to keep financial reform at the top of the Communist Party agenda by cultivating support from Xi on down. One sign of optimism, according to a September report from Beijing-based policy research firm Trivium China: At least 13 officials with strong backgrounds in finance have taken high-ranking provincial government posts in the past three years.
Ultimately, however, the health of China’s vast banking system doesn’t rest on the shoulders of a single bureaucrat, no matter how skillful or respected or well-connected. “Financial reform is not a one-man issue,” says Pettis, the professor at Peking University. “It’s a national effort.”