China may further loosen monetary policy to bolster growth

Source:Global Times Published: 2020/7/2 17:46:42

Illustration: Tang Tengfei/GT

In its first three weeks of open market operations in June, the People's Bank of China (PBC), the country's central bank, has been taking liquidity away from the market. Keeping the benchmark lending rate unchanged, the central bank's monetary "tightening" has upset market expectations of further easing. Investors are concerned that the overall monetary policy in the second half of the year may continue to tighten.

As it is slowing its pace of releasing liquidity, the central bank likely intends to improve money transmission efficiency. Earlier proactive monetary policy to cushion the coronavirus impact has largely accelerated currency supply and social financing growth, driving both to new highs. But some money is still stranded in financial institutions.

The PBC is aware of the situation and intends to better target liquidity injections so as to allow the market to digest the stranded money. The slowdown in the release of liquidity has already driven market interest rates higher and squeezed out idle funds.

The US Federal Reserve's ultra-loose monetary policy has caused excessive liquidity across the world. As the PBC slows its monetary easing pace, backed up by China's successful containment of the novel virus, more overseas capital is being attracted to the country.

As China's economy is recovering and its financial market is being further opened up, overseas capital is flowing into the A-share market through the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect. 

According to a monthly report from the China Central Depository & Clearing Co (CCDC), the net increase of foreign investment in China's equity market amounted to 114.59 billion yuan ($16.22 billion) in May. The monthly net increase in holdings reached a record high.

According to PBC officials, China is not likely to change its trend of monetary policy easing soon. Monetary policy in the coming months will continue to serve the "Six Priorities" and remain appropriately loose and flexible. 

PBC governor Yi Gang recently noted that in the second half of 2020, the central bank will use monetary policy to ensure liquidity is at a "reasonably ample" level, with new loans to hit 20 trillion yuan for the full year and total social financing likely to increase to 30 trillion yuan.

Yi also noted that the financial support offered during the epidemic response period is being phased out, and China should pay attention to the aftermath of the policy and consider the timely withdrawal of policy tools in advance.

The central bank's recent actions mean that the loosening pace will be adjusted. Whether or not the RRR and market-based interest rate cuts are continued, money supply may be carried out in a better-targeted manner.

Some market agencies say that with the acceleration of production resumption, a large number of infrastructure projects are expected to be put into operation quickly, and the disbursement of financial funds will pick up speed in the next few months. In this context, a more flexible reverse repo is suitable for short-term liquidity adjustment. Considering the large supply of government and local bonds in the second half, reverse repo operations will still be frequent. 

The general trend of economic recovery will dominate the direction of interest rates, and future interest rate rises may be unavoidable. The period with the loosest monetary conditions may be passing, according to Wu Ge, chief economist of Changjiang Securities.

Of course, the recent currency supply tightening may make room for the late RRR cut, and the possibility of a near-term RRR reduction is still very high. 

However, the RRR cut is more about maintaining medium-term market liquidity, cooperating with the currency demand that comes with special government and local bond issuance, and maintaining the continuous expansion of the social financing scale.

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

Posted in: EXPERT ASSESSMENT

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