China’s central bank shuns stimulus ‘flood’ as pressure intensifies

By Lian Ping Source:Global Times Published: 2018/11/28 21:48:41

Illustration: Luo Xuan/GT


Given the aftereffects of China's past large-scale stimulus plans, an important goal of the central authorities in setting monetary policy is not to flood the market with liquidity again.

As no phrase such as "no flood-like strong stimulus" was included in the latest monetary policy report, some observers speculated that the People's Bank of China (PBC), the central bank, might reconsider stimulus measures, but this idea is totally groundless.

Two rounds of policy easing in 2009 and 2015 had unique economic backgrounds. In 2009, the US subprime mortgage crisis set off the global financial crisis; in 2015, the Chinese stock market plunged. Loose monetary policy may have been the answer to those crises at the time, but it also had side-effects.

For instance, in response to the 2008-09 financial crisis, China launched a large-scale stimulus package, which ended up causing a surge in housing prices, increased production capacity in obsolete industries, high inventory in the real estate sector and high local government debt.

After years of deleveraging efforts, China's overall leverage ratio was 248.9 percent at the end of June this year, 0.3 percentage point lower than a year earlier, statistics show.

Meanwhile, the leverage ratios of non-financial enterprises and the government fell in the first half of this year, while the household leverage ratio grew at a slower pace of 2 percentage points.

Apparently, the leverage of the Chinese economy has been stabilized. If we return to the path of "flood-like stimulus," we risk destroying the previous deleveraging efforts. Therefore, the central government has already made it clear that liquidity shouldn't pour into the market. Instead, it should be directed in a precise way, with the aim of providing financial support to the real economy. In its latest monetary policy report, the central bank also said that monetary policy will be kept neutral, neither too tight nor too loose.

The current policy tone will remain prudent while keeping liquidity reasonably ample. This means that liquidity will be slightly more relaxed than in the previous period, which is obviously necessary considering the current economic situation.

In the first 10 months of this year, China's fixed-asset investment rose 5.7 percent year-on-year, a decrease of 1.6 percentage points compared with the same period last year, according to the National Bureau of Statistics.

Due to sluggish vehicle consumption and the slowdown in property sales, overall consumption has shown signs of weakness. The latest export figures seemed quite brisk, but that may reflect front-loading of export orders to cope with the China-US trade war.

Overall, the Chinese economy still faces relatively great downward pressure, so it is necessary to loosen monetary policy sufficiently to support the stable operation of the real economy. That doesn't mean there's a need for a flood-like stimulus.

In the meantime, as a result of financial deleveraging efforts and related policies, the rapid contraction in new social financing has created considerable difficulties for financing of the real economy.

Statistics show that China's off-balance-sheet financing fell for eight consecutive months, starting in March.

From January to October, off-balance-sheet financing dropped by 2.57 trillion yuan ($327.44 billion), compared with a year-earlier increase of 3.04 trillion yuan. Meanwhile, on-balance-sheet financing was relatively steady, and M2 growth was 8 percent in October.

The social financing figures show that the credit environment was relatively tight from last year to the first half of this year, and this situation was mainly reflected in non-credit financing, including off-balance-sheet business.

The contraction of non-credit social financing will directly affect some high-risk enterprises with high financing costs, and they may face greater short-term repayment pressure or even liquidity problems.

Since most non-credit financing is obtained by private enterprises, the fall in such financing will inevitably make it difficult for private enterprises - especially small and micro-sized ones - to borrow. Moderately loosening monetary policy will ease the financing woes of companies that are dealing with a contraction in off-balance-sheet financing.

If the central bank doesn't inject liquidity into the market in a timely manner to maintain liquidity and keep market interest rates low, the financial market may enter a tightening cycle, exerting even greater pressure on the economy.

Without mentioning a "flood-like stimulus" in its latest monetary policy report, the central bank sent a clear signal as to its policy orientation: there will be no strong stimulus. More importantly, the report pointed to monetary policy priorities for the next stage, which will focus on improving financial support to private enterprises.

In the near term, the adjustment of China's monetary policy will involve controlling the total amount of liquidity and adjusting the structure of financing. The central authorities are unlikely to engage in another flood-like stimulus.

The author is chief economist with Bank of Communications.

Newspaper headline: PBC shuns stimulus ‘flood’ as pressure intensifies


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