Why the People’s Bank of China is having a good coronavirus pandemic

China’s central bank’s measures have been relatively restrained, leaving it with more room to manoeuvre monetary policy
The country’s improving economic data shows that the bank’s nuanced strategy has paid off

Neal Kimberley

Published: 5:00pm, 7 Jul 2020

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Give credit where credit is due. The People’s Bank of China (PBOC) is having a good pandemic. China’s economic recovery from the Covid-19 outbreak is continuing even if it remains a little uneven. That partly reflects the success of the central bank in crafting a monetary policy response to the pandemic that is well suited to China’s situation.

That doesn’t mean that other major central banks such as the Bank of England, the European Central Bank or the Federal Reserve have been remiss in their own responses to Covid-19, but simply that the PBOC’s approach has been somewhat different, and arguably more nuanced.

Chinese economic data has been improving. May’s 4.4 per cent year-on-year uptick in industrial production was the strongest figure since December 2019, while Caixin/Markit purchasing manager index data had its biggest jump in June since April 2010.

Admittedly, China was the first country to face Covid-19 and so should be expected to be one of the first to recover from it. Equally, the Chinese authorities were able to enforce a tight lockdown on coronavirus-afflicted areas quickly and effectively. That said, the policy responses of the PBOC do stand out.

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Elsewhere, independent central banks, such as the Bank of England, the ECB and the Federal Reserve, have all reacted to the health crisis by cutting interest rates aggressively and rolling out programmes of quantitative easing, monetary policy measures that have gone hand in hand with generous governmental fiscal stimulus.

But that also comes with risks. Such fiscal stimulus leaves governments with significant increases in public debt that will have to be managed. Once the pandemic wanes, financial markets will expect independent central banks to reassert their independence when it comes to monetary policy normalisation even if governments, hoping to keep down debt servicing costs, press for lower interest rates for longer.

How those tensions play out remains to be seen. The PBOC is clearly not independent of central government influence in the same way that the Bank of England, ECB or Federal Reserve are, but China’s central bank has not gone “all in” with interest rate cuts and quantitative easing when crafting policy to counter the economic impact of Covid-19 on the Chinese economy.

Financial markets might even reasonably conclude that the PBOC has more left in the “policy locker” than other major central banks, if the economic situation worsens.

The Chinese flag flies at half mast at the headquarters of the People’s Bank of China in Beijing on April 4, as China marked the Ching Ming festival by holding a day of national mourning for those who died of Covid-19. Photo: Reuters

Larry Brainard, chief emerging market economist at TS Lombard, an independent investment research firm, feels that PBOC awareness of shortcomings in China’s financial system and “the recognition that [Chinese] savers matter” have characterised the monetary policy response.

In truth, all central bank policy responses must reflect local conditions.

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In China’s case, as Brainard wrote on June 29, “Rather than flood the economy with liquidity, [China’s] financial regulators imposed financial forbearance on the banks, and asked the large banks to ‘sacrifice’ 1.5 trillion renminbi (US$211 billion) in profits this year via reductions in loan interest rates and other charges while stepping up directed lending activities.”

Brainard also noted that “in a country of compulsive savers”, the Chinese authorities “do not want to stir up popular discontent by forcing [Chinese] banks to reduce interest on saving accounts held by ordinary citizens” and that “doing so might, in fact, lead to higher savings rates”, which would be counterproductive when Beijing needs China’s consumers to restart spending.

People wearing face masks gather at a pedestrian shopping street in Beijing on June 6. China is keen to boost consumer spending to boost economic growth. Photo: AP

Perhaps that helps explain why the PBOC has, so far at least, shown a sparing approach to interest rate cuts, one that has arguably helped enhance the yield attraction of Chinese government bonds, in the current environment, to investors.

Indeed, US bank BNY Mellon argued on July 2, that the Chinese government bonds market “offers attractive yields between 2.4 per cent in the three-year and 3.4 per cent in the 20-year.”

Of course, it could be argued that the PBOC has options at its disposal that its central bank peers do not. Certainly, policymakers in Western economies couldn’t so easily force such forbearance on their banks.

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It could also be argued that if PBOC policy responses to Covid-19 are guided by an awareness of existing structural weaknesses in China’s financial system, that’s hardly a cause for celebration.

But, every central bank has to work inside the confines of the situation which it finds itself in, just as the Fed had to do during the global financial crisis. Financial markets understand that.

As it stands, the PBOC has crafted a nuanced monetary policy response to the coronavirus that is well suited to China’s circumstances and which may underpin demand for Chinese government bonds. China’s central bank is having a good pandemic.

Neal Kimberley is a commentator on macroeconomics and financial markets

This article appeared in the South China Morning Post print edition as: China’s central bank has done well in responding to pandemic

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