U-turn by top Chinese planner gives glimpse into dispute on policy direction
Top planner raises eyebrows by pulling suggestion on interest rates, pointing to internal discord on how to improve the ailing economy
It’s not rare for the mainland’s top planning agency to publicly urge the central bank to cut interest rates, but it is almost unprecedented for it to withdraw the public appeal less than 12 hours later.
That’s what happened on Wednesday. That morning the National Development and Reform Commission’s policy research department put a statement on its website calling on the central bank to “unswervingly lower various corporate costs, and to further deploy policies to cut interest rates and reserve requirement ratios”.
The markets, the yuan and stocks responded to what was seen as a strong signal to loosen monetary policy to support the ailing economy. But, the sentence was removed that afternoon.
Morgan Stanley Huaxin Securities chief economist Steven Zhang said the NDRC article had no policy weight because it came from a research bureau “but it was posted in the most prominent position on the website which led to excessive market interpretation”.
It is not the first time that the NDRC has made suggestions on monetary policy, but the about-turn was a rare glimpse of government discord about what to do next.
“I believe internally there is active debate on what should be done on the economy,” said Louis Kuijs, head of Asia economics at Oxford Economics, said. “Not everybody is happy with the current approaches.”
A source close to the government said that in joint policy meetings “government departments pass the buck, defend themselves and blame others”.
“The State Council does not do enough to coordinate movement of various departments. It sends mixed policy signals. Bureau heads are busy drafting documents but no one cares about implementation and cooperation,” the source said. “Given the possible dramatic changes in personnel ... next year, they are reluctant to lead on policy and reform. No one wants to take political risks.”
Nevertheless the NDRC’s job is to ensure growth does not to fall below 6.5 per cent this year. It must also promote tough reforms to rebalance the economy.
The central bank must also safeguard economic growth but it o needs to stem risks in exchange rate and financial turmoil. It has repeatedly insisted that monetary policy alone cannot resolve the country’s structural problems.
That’s why the central bank has refrained from sending strong loosening signals, opting instead to call for coordination on reforms and joint efforts with the Ministry of Finance.
To that end, Sheng Songcheng, head of the central bank’s statistics department, has called for increasing the budget deficit ratio and promoted tax cuts over rate cuts as a way to encourage corporate investment.
But in any case, unlike their overseas counterparts, the ministry and the central bank were not really in charge of policy, Kuijs said. In China, such decisions come from more senior bodies.
Zhang said the downward risks were big and policies needed to be loosened in the third quarter to ensure growth.