Why the People’s Bank of China is easing monetary policy carefully, with a chisel not a sledgehammer

This month, China’s central bank cut lending rates by just 5 basis points. Unlike during previous slowdowns, the PBOC is keen to avoid flooding the economy with liquidity and starting another boom-bust cycle

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Elderly depositors seek information about the safety of their savings at a branch of Yingkou Coastal Bank in Yingkou, Liaoning province, on November 8. China’s cuts in lending rates to shore up a slowing economy have put more pressure on small banks like Yingkou. Photo: Reuters

Published: 10:00pm, 29 Nov 2019Updated: 10:23pm, 29 Nov 2019

China’s economic growth remains on the back foot, with both structural and cyclical factors undermining the economy’s rate of expansion.

Unlike during previous slowdowns, such as the global financial crisis of 2008 and 2009, the People’s Bank of China is adopting a painstaking approach to easing monetary policy: it is like an artist honing a marble statue with a chisel, instead of smashing up slabs with a sledgehammer.

In the year ahead, there are good reasons for the PBOC to persist with such a constrained, surgical approach.

On November 19, the central bank trimmed its one-year and five-year loan prime rates by 5 basis points, to 4.15 per cent and 4.8 per cent respectively. This adjustment was widely expected, given that the seven-day reverse repurchase rate had also been lowered by 5 basis points earlier that week.

Yet the cut was very small, compared with the more usual 25-basis-point adjustments that other major central banks make.

The direction of China’s monetary policy is largely expected, since economic data remains weak. The ongoing trade war with the United States is hurting China’s export performance and, more importantly, curbing business confidence and curtailing investment.