Macroscope | On financial risk, People’s Bank of China is more credible than the US Fed

Name: China investment should follow Westphalian principles, says Nobel laureate Paul Romer
Uploaded: 2021-02-02T14:00:08.000Z
Duration: 3 min 29 s
Description: China investment should follow Westphalian principles, says Nobel laureate Paul Romer

In draining cash from the banking system ahead of Lunar New Year, the PBOC is sending a message of caution. In contrast, the Fed is underplaying the connection between cheap credit and a stock market frenzy in the US

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Federal Reserve chair Jerome Powell prepares for a House Financial Services Committee hearing in Washington on December 2 last year. The Fed’s ultra-loose monetary policy settings remain the order of the day even though they may have undesired side-effects. Photo: Reuters

Neal Kimberley

Published: 10:00pm, 2 Feb 2021Updated: 12:04am, 3 Feb 2021

The US Federal Reserve and the People’s Bank of China are on diverging monetary paths, calibrating policy to fit the needs of the American and Chinese economies respectively. But investors may decide that it is the PBOC’s stance that has the greater credibility, and credibility matters to markets.

It’s quite clear that the trajectory of China’s monetary policy is currently different from that of the United States. While it is important to bear in mind that China is materially ahead of the US in its economic recovery from the coronavirus pandemic, investors have to look forward, not backwards, and when assessing the merits of central bank policies, investors have to evaluate who seems to have the best game plan.

As it stands, the Fed is unable to look beyond the current economic emergency. Ultra-loose monetary policy settings remain the order of the day even though they may have undesired side-effects that will ultimately create new problems if unaddressed.

In contrast, the PBOC has been pointing out the need to address the unintended consequences of pandemic-related monetary policy accommodation before they get out of hand.

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China investment should follow Westphalian principles, says Nobel laureate Paul Romer

Indeed, Ma Jun, a member of the PBOC’s monetary policy committee, remarked recently that “the leverage ratio has risen very fast, requiring monetary policy adjustments” and that a further substantial rise in leverage “will naturally lead to future financial risks”.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | On financial risk, People’s Bank of China is more credible than the US Fed

Macroscope | On financial risk, People’s Bank of China is more credible than the US Fed