In its latest quarterly report, China’s central bank said its three overriding tasks are stabilizing growth, adjusting the economic structure and preventing potential risks.
It’s worth noting that deleveraging, which was outlined as a key task since 2016, has been removed from the list of the top three priorities. Does that mean the People’s Bank of China (PBoC) has completed the deleveraging process and shifted to pumping more liquidity into the market?
There are several factors why the PBoC has changed its rhetoric. First, the external environment remains unfavorable following a trade row with the United States.
Though the trade war has shown signs of cooling off, and US President Donald Trump pledged on Sunday to help ZTE Corp “get back into business, fast”, Washington’s promise comes with a cost.
China will need to cut subsidies for certain industries and let the US impose duties on certain products.
Meanwhile, dollar strength will keep liquidity tight in global markets, which has already resulted in a currency crisis in Argentina.
Against this backdrop, China may need to ease its monetary policy slightly to cushion against risks and ensure stable growth.
Second, Beijing needs to take the impact of tightening housing policy into consideration. The central government has stressed that “housing is for living, not for speculation” and spared no effort in cracking down on property speculation.
One should note that the housing sector, closely tied up with various upstream and downstream industries — including steel, construction, transportation, consumer electronics and retailing — plays a pivotal role in the economy. It’s estimated that property sector contributes to nearly one fourth of China’s GDP.
Given this, a tightening housing policy is set to weigh on economic growth. And the authorities need to bolster liquidity for other real-economy industries such as technology, and small and micro enterprises, to offset the drag effect from cooling property sector.
Third, the efforts in deleveraging since 2016 have already paid off. The corporate sector leverage ratio has dropped to 159 percent by the end of last year, down 0.7 percentage points from the year before. That marks the first decline since 2011, and reversing the rapid gain since 2016.
And the government leverage ratio also declined by 0.5 percentage points to 36.2 percent in the same period. That shows there is room for the government to expand fiscal expenditure.
Meanwhile, the household leverage ratio has increased by 4 percentage points in the same period, which remains at a very low level compared with other economies.
Last, Chinese policymakers have issued new rules on banks’ wealth management products, in order to put the 60 trillion yuan strong “shadow banking” under the government oversight. As shadow banking gets exposed, therefore, the risks are more manageable.
China’s monetary policy stance may shift to neutral. But investors should not expect that the authorities would pump excessive liquidity into the market. There is little room for Beijing to cut interest rates, given that the US in the middle of a rate hike cycle.
Overall, authorities are likely to continue only targeted easing and reserve requirement ratio cuts to keep the exchange rate stabe and ensure sufficient market liquidity.
The full article appeared in the Hong Kong Economic Journal on May 15
Translation by Julie Zhu
[Chinese version 中文版]
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