Date
22 September 2017
Still-high leverage and a relatively stable economic growth rate suggest the Chinese central bank has neither room nor urgency to change its neutral to slightly tight monetary policy. Photo: China Daily
Still-high leverage and a relatively stable economic growth rate suggest the Chinese central bank has neither room nor urgency to change its neutral to slightly tight monetary policy. Photo: China Daily

Where is China’s monetary policy heading?

A national financial work conference is approaching in China, and financial regulation has once again become a key topic.

There had been much talk earlier that China intends to create a super financial regulator through the merger of the banking, securities and insurance regulators. But now it appears more likely that the People’s Bank of China (PBoC) will just lead a team to improve communication among different financial regulators.

The central bank has basically maintained neutral and stable monetary policy and has ensured reasonable credit growth and stable liquidity in the second quarter.

As regards the near-term monetary policy, I believe the PBoC will stay on a neutral course with a slight bias to the tightening side for a number of reasons.

First, China’s financial deleveraging measures have started to generate some desired results. But the nation’s leverage level remains at higher level than that in US or Japan. Risks associated with excessive credit are still high, leaving authorities with little room to ease.

Meanwhile, US economic recovery is on track and the job market there is close to full employment. Therefore, crude oil prices may bounce back in the second half of this year.

Fundamentals will likely support the Federal Reserve’s plan to shrink the balance sheet and further hike the benchmark interest rate. The European Central Bank is also on course to normalize its monetary policy soon.

Tightening monetary policy in US and Europe will limit the room for China to ease its policy or loosen regulation.

Also, China needs to impose stricter financial regulation as it accelerates financial liberalization, in order to mitigate financial risks.

As a matter of fact, the PBoC, in the annual China Financial Stability Report, has put top priority on preventing financial risk. 

China’s economic growth hit 6.9 percent in the first quarter, beating market expectations. The pace of growth could slow down a bit to 6.6 percent in the third quarter.

But unless growth rate drops below 6.5 percent, the monetary policy is unlikely to change course.

This article appeared in the Hong Kong Economic Journal on July 10

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Senior investment banker

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