Illustration: Luo Xuan/GT

The People's Bank of China (PBC), the central bank, on Saturday released a monetary policy report for the third quarter of 2019. It shows on one hand that the economic slowdown is placing increasing pressure on China's goal of stable growth; on the other hand, the consumer price index is on the rise and a declining producer price index has underlined the problem of the country's economic structure. 

The PBC will maintain a prudent monetary policy and enhance countercyclical adjustments. Dilemmas in economies lead to dilemmas in macroeconomic policy - that is also the focal point of argument and debate surrounding China's current monetary policy. China's dilemma is that its economy is under downward pressure and internal issues in the Chinese economy have worsened, thus the leeway for policymakers has been reduced. Macroeconomic policy will face increased difficulties and decreased room for maneuver.

The nation's monetary policy focuses on serving the real economy and lowering financing costs for companies, the latter of which also faces a predicament. Current financing costs on the financial market have structural problems, given the significant differences among regions, in ownership and company size. 

Financing costs on the east side of China are relatively low, and it costs more to raise funds in the western part of the country. Fundraising costs for large and micro-sized companies have been lowered due to the introduction of beneficial policies. However, it continues to become more costly for small and medium-sized enterprises to obtain funds. Gaps in credit among different types of companies are getting wider. This situation has created a dilemma for policies aiming to lower financing costs. 

The PBC's monetary policy is seeking a balance between two predicaments. Monetary policy has to be stable and prudent, without lifting the floodgates and pumping up inflation expectations, but central banks have stressed the need for countercyclical adjustments, hoping to inject liquidity into economic entities. There is space for marginal easing in monetary policy. The PBC will continue to channel liquidity into targeted entities with looser monetary policies. Meanwhile, the central bank will cut financing costs through market methods including financial system reform, boosting financial institution efficiency and unclogging the monetary transmission mechanism.

The PBC needs to ensure that monetary policy is sufficient to achieve the full-year growth target of 6 percent. It also needs to create the "main policy axis" around which the economy will revolve for the next year. This means that basic policy direction and policy tools need to be decided based upon key issues and major risks. That is to say, the nation should maintain a loose monetary policy, fitting into the overall policy trend. 

Several market institutions have pointed out that monetary policy orientated toward strengthening countercyclical adjustments has become clear. In the wake of reductions for reserve requirements, interest rate cuts are expected in the future, in addition to a continuation of drip-irrigation-style targeted measures for the manufacturing sector, privately run businesses, and small and micro-sized companies. Growth in the broader M2 monetary supply, social financing, and new yuan loans is likely to pick up also. 

The slowdown in the Chinese economy is set to continue. China has encountered some internal issues that won't be easily overcome or addressed in the short term, and which are compounded by the external economic environment unharnessed by China's policy. Holding onto a loose monetary policy thus matters immensely to businesses, individuals and even the government, as only in so doing will the continued slowdown in domestic consumption and investment be halted.  

In view of the PBC's push to reform the interest rate regime and establish the loan prime rate pricing mechanism, it will still be difficult to meet a short-term goal of fine-tuning the monetary transmission mechanism by lowering bank interest rate spreads, when the cost of funds remains unchanged. Improvement is still needed in the supply and demand order to ensure M2 growth matches economic growth. In terms of price, monetary easing helps relieve the difficulties currently faced by the manufacturing sector, and helps rein in a continued downward spiral in the producer price index. Meanwhile, consumer price index structural issues are a problem which can be addressed by ramping up investment to fill the supply gap, rather than pointing to monetary contraction. 

The Chinese economy should maintain a decent speed. Economic deceleration will result in less macroeconomic policy leeway and make it harder to achieve countercyclical adjustments. Therefore, maintaining stable economic growth is a more pressing issue at this time. Economic growth has been curbed from rapid ascent in the past and cannot be too slow now and in the future. 

The difficulties and problems faced by the Chinese economy are a reflection of accumulated internal and external conflicts, which require systemic reform to resolve. And macro monetary policy easing should be launched first to provide a stable and favorable monetary environment. 

The article was compiled based on a report by Beijing-based private strategic think tank Anbound. bizopinion@globaltimes.com.cn