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

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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The current economic background

From the second quarter 2018 to the second quarter 2019, China’s economy grew 6.2%, compared to 6.4% year-on-year growth in the first quarter of 2019. The second quarter economic growth rate was the country’s slowest pace since the first quarter of 1992 when quarterly GDP measurement started. The Chinese economy faces a complex situation with increasing external uncertainties, particularly, China’s ongoing trade dispute with the U.S. was main factor of downward pressures. So far, the PBoC has only carefully supported the economy through mildly expansionary policy. Assuming that the global economic climate does not improve, this might change over the course of the current year.

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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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