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

As China's vaccination rate continues to rise, the government accelerates the normalization of economic activity, leading to a return of consumer confidence and encouraging investment. In the second quarter, the pace of its recovery slowed considerably as the country contended with surging commodity prices and supply chain disruptions. The economy still has been growing at a rate of 1.3% over the first quarter, corresponding to 7.9% in comparison to the same period last year, compared to an 18.3% year-on-year increase China registered in the first quarter — though that record-breaking figure largely reflected how much the economy slumped in early 2020, as the coronavirus pandemic was taking hold. One of the main reasons for the slowdown was the slowing growth in the service sector due to a Covid-19 outbreak in southern China and subsequent containment measures which curbed consumer and business activity. Exports remain the biggest driver of growth.

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The current economic background

The outbreak of COVID-19 in 2020 was traumatic for the Chinese economy, but China has overcome this crisis and its economic development is again healthy and sound. Since the trough in early 2020 China has shown an exceptional recovery with 18.3% (year over year GDP growth) in the first quarter 2021, marking China's highest annual growth rate since it first began recording GDP growth in 1993. Quarter over quarter the Chinese economy grew by 0.6% showing that most of the recovery already occurred in 2020. China largely benefited from reopening economies around the globe, the total value of China’s exports rose by 38.7% in the first quarter of 2021 compared to the same quarter of 2020.

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The current economic background

In 2020, the world's most threatening challenge was the economic, social, and public health impacts of the COVID-19 pandemic. Even so, China is still the second largest global economy, the largest exporter, and has the largest exchange reserves in the world. However, even though China has one of the fastest-growing GDPs in the world, its economic growth was abruptly slowed to 1.9% in 2020, against 6.1% in 2019, due to the impact of the COVID-19 pandemic. Although the trade war with the US continued, it no longer was the most pressing issue for China in 2020. Yet, with two major shocks affecting the Chinese economy, it is too early to quantify how much the trade war did affect the Chinese economy. The situation did put quite a significant pressure on the government budget; the budget balance reached a record low of -10.2% of GDP in 2020 compared to -5.9%the previous year. Debt has risen to 61.7%, and this number might have to be corrected upwards when the final numbers are in.

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The current economic background

In the first quarter of 2019, it seems as if China and the U.S were making considerable progress in their negotiations for a trade deal, particularly regarding an enforcement mechanism to alleviate American concerns that the Chinese side would not follow up on promises. However, the unresolved international trade dispute made the global economy fragile and unstable. To offset the negative influence of a challenging global economic climate, the Chinese government has announced several economic stimulus measures, most notably including a VAT tax cut, and a reserve requirement ratio (RRR) reduction. Regardless of the relatively low GDP growth forecast, the Chinese stock market performed well in the first quarter of 2019. The GDP rose to 21.34 trillion in the first quarter, which corresponds to a year over year growth rate of 6.4%, exceeding expectations.

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