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People’s Bank of China (PBOC)
Business
Neal Kimberley
Neal Kimberley

Coronavirus recovery: China’s prudent monetary policy shows where smart money is

  • In other major economies, central banks’ response to Covid-19 has been a dramatic loosening of monetary policy, but China’s central bank has been more nuanced
  • The recovery of China’s economy has proceeded without the PBOC going all-in, leaving it more options to use in the future

Reading Time:3 minutes
Why you can trust SCMP
A woman walks past the headquarters of the People’s Bank of China in Beijing in 2018. The Chinese central bank’s refusal to embrace the expansionist monetary policy of its peers has left it more options as the country’s recovery from Covid-19 continues. Photo: Reuters
Neal Kimberley
Part of the art of investing is knowing what the crowd will do before the crowd itself knows, and acting accordingly. China’s economic rebound from Covid-19 may still be uneven, but the green shoots of recovery are evident and the People’s Bank of China has been shrewd in its policy moves.
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The investing crowd may decide China is again the place to focus on. Industrial production in China, a measurement of manufacturing and mining output, expanded by 4.8 per cent in July on a year-on-year basis. That matched June’s increase and continued China’s four-month growth expansion after the pandemic-driven contraction of the first quarter of 2020.
Admittedly, retail sales in China disappointed in July, falling well below analyst expectations for the first monthly increase of 2020 and registering a 1.1 per cent decline year on year. This followed falls of 1.8 per cent in June and 2.8 per cent in May.

Given that China is the world’s biggest market, retail sales matter but consumers can’t buy products if the production chain isn’t functioning. Additionally, the Chinese workers who power China’s industrial output are also consumers. The more secure that workforce feels, the likelier it is those workers start to spend.

Of course, there is a risk if industrial production gets ahead of the real economy. It could have a disinflationary impact on factory gate prices and then feed into the core consumer price index.

05:02

Coronavirus backlash further fraying China’s ties to global economy

Coronavirus backlash further fraying China’s ties to global economy

Albert Edwards, global strategist at French bank Societe Generale, noted last week that there was “a slump in China’s core CPI inflation in July to only 0.5 per cent [year on year] versus a 0.9 per cent rise in June” and that China’s gross domestic product “deflator dropped into deflation” in the second quarter.

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