Macroscope | Will looser Chinese monetary policy save the day? Don’t hold your breath

One of the big themes in financial markets these days is shifts in monetary policy. Among the world’s major central banks, the key factor that has given rise to intense speculation about policy pivots is the dramatic rise in inflation, which has proved more persistent than expected.

The other shift that is garnering attention is the change in tone on the part of China’s government regarding the threat posed by the sharp property-driven downturn. While US policymakers are increasingly worried about inflation – consumer prices could hit 7 per cent in November, more than twice the rate in China – their Chinese counterparts are much more concerned about growth, and the need to minimise the collateral damage from the impending restructuring of China Evergrande Group’s debt.

Markets have seized on a series of growth-friendly statements and measures over the past few weeks. On Monday, the People’s Bank of China (PBOC) announced it would cut the share of deposits banks must hold in reserve, freeing up US$188 billion of liquidity.

Beijing has also signalled its willingness to stabilise conditions in the property market, suggesting its crackdown on leverage and debt in the sector may have gone too far. Striking a balance between shoring up growth and pursuing structural economic reforms has become increasingly difficult for the government. Some investors believe Beijing is now leaning towards significantly looser policy.