Monetary Policy Report

In our MP Reports, we aim to provide a concise and timely analysis of Chinese monetary policy that makes it accessible for an international audience. The reports are published at least at a quarterly basis, more often if surprising policy changes warrant further information.

The current economic background

Over the past quarter, the external economic environment has become increasingly challenging for China. A bulk of bad news hit the financial markets in quick sequence. First, on Chinese National Day this year, another round of U.S. tariffs were imposed on Chinese goods, and the trade war between the United States and China kept escalating. This changed only most recently, when US president Trump delayed the previously threatened next round of tariffs following a meeting with Xi Jinping during the G20 summit. However, the relations are still difficult.

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The current economic background

In the second quarter of 2018, the PBoC faced many international and domestic challenges.

Since early 2018, the PBoC has initialized a series of policies to curb risk in national financial markets such as cracking down on shadow bank financing and tightening the supervision of asset management. At the same time, the PBoC cut the required reserve ratio (RRR) to mitigate the impact of increasing regulation and help commercial banks move off-balance-sheet loans back to their balance-sheet. Yet, industrial companies are clearly feeling the consequences of the deleveraging policy of the past few quarters. It has become increasingly difficult to raise new funds and repay existing debt, leading to a record number of bond defaults this year.

In consequence, the PBoC is gradually shifting its focus from macroprudential policies to stabilization. Over the past month, the use of the term “deleverage” in official documents issued by the PBoC has been gradually declining.

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The current economic background


In their first term in office the PBC’s new governor Yi Gang and new party secretary Guo Shuqing, who have been appointed at the 13th National People’s Congress this March, are facing interesting times to say the least.


With the “new normal” it is still hard to assess the location of the Chinese economy in the business cycle. Growth is  substantially lower than it has been in the pre-crisis period (and immediately after), and at this point it is hard to judge, how much of this can be attributed to the business cycle and how much to the inevitable slowdown of growth with China approaching the natural end of its miraculous catching up process. In consequence, monetary policy faces almost  unprecedented uncertainty.

 

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