China’s central bank rules out major stimulus because financial risks are ‘controllable’
- People’s Bank of China says there is no need for major loosening of policy because growth will stay within a ‘reasonable range’
China’s central bank has sought to counter market speculation that it would engage in a significant loosening of monetary policy next year to offset a slowing economy and trade uncertainties, saying that financial risks are “controllable” and economic growth will remain within a “reasonable range”.
“Monetary policy is still prudent,” said Sun Guofeng, who oversees the monetary policy department at the People’s Bank of China. He added there “will be no deluge of stimulus” but rather targeted adjustments, macro controls and discretion.
“Because the situation is comparatively complex, [we] need to be more forward-looking and flexible to counter it,” he told a media briefing in Beijing.
His comments came after a statement by the banks’ monetary policy committee a day earlier that did not say anything about the interruption of the “deleveraging” campaign to reduce excess debt and risky lending due to concerns about its impact on the weakening economy.
The lack of comment was taken by many market analysts as a signal that the central bank was planning to ease its policy in the new year to counter the economic slowdown.
The PBOC cut the required reserve ratio – the money that banks are required to hold in reserve at the central bank – four times this year and a week ago created a new targeted medium-term lending facility from which banks can borrow at a lower interest rate than they can otherwise to support lending to small and medium-sized private firms.
Most of these targeted easing steps were taken after the Politburo switched the government’s policy focus to economic stabilisation at the end of July.
The vast majority of market forecasts point to a further slowing of growth in 2019 from this year’s target of “around 6.5 per cent” due to the effects of the trade war with the United States.
Last week’s Central Economic Work Conference, the meeting of top leaders to set the economic policy direction for next year, pledged to use countercyclical measures and “timely policy fine-tuning” to support the economy.
It concluded that “prudent monetary policy should be neither loose nor tight. It should maintain reasonably ample liquidity, improve the monetary policy transmission mechanism, increase the share of direct financing, and solve the funding difficulties and high financing costs of private and small firms”.
However, officials have made clear that it would avoid the massive economic stimulus measures that it employed a decade ago to combat the global financial crisis. Beijing learned an expensive lesson from that all-out stimulus, with many of its side-effects – including industrial overcapacity and a high debt level – still unresolved.
There are widespread expectations from market analysts that Beijing will enact a more proactive fiscal policy next year, with a large budget deficit to support additional infrastructure spending and a major tax cut.
Central bank spokesman Zhou Xuedong said the PBOC’s policies would remain relatively flexible, with officials focusing on pre-emptive adjustments and fine-tuning. “The level of loosening or tightening will depend on the reaction of market and companies,” he said.
Zhou, who stepped down as head of the financial stability bureau earlier this week, argued that the stability of China’s financial system would provide confidence
The nation’s overall indebtedness has “basically stabilised”, he said. According to the latest data from the Bank for International Settlements, China’s debt-to-GDP ratio stood at 253.1 per cent at the end of June, down 0.3 percentage points from the previous quarter.
And even though the domestic A-share market is down 24 per cent this year, making it one of the worst performers globally, “there has been no panic selling or a collapse of a large number of listed firms”. “Market participants have become more mature and they can bear, or at least accept, such a market correction,” Zhou said.
Most importantly, “large banks are in good shape during such a high-risk period”. Banks account for 87 per cent of the country’s financial assets, with three quarters of total bank assets are controlled by a handful of the country’s biggest banks.
“[Big banks’] capital adequacy ratio is over 12 per cent, far higher than the mandatory requirement of 10.5 per cent. They meet [the high] standards of the Basel III Accord [on bank capital requirements] and their non-performing ratio is overall low,” Zhou said.
Both the central bank and the China Banking and Insurance Regulatory Commission perform annual stress tests and evaluations of major banks.
Zhou also said problems at smaller rural commercial banks, despite their relatively higher risk, would be easy to handle.
“Even if [the risk of problems at] some institutions occur, they would be no problem to resolve because the deposit insurance system has been in place and the fund has already accumulated nearly 100 billion yuan (US$14.5 billion),” he said.
Ruan Jianhong, the head of the central bank’s statistics department, said the main areas of concern were the slowing of the global economy, the plunge in the growth rate of investment and the difficulties small and medium-sized private firms were facing.
Even though investment growth has stabilised, it remains low compared to previous years, she said.
Chinese fixed-asset investment rose 5.9 per cent in the January-November period compared with a year earlier, down from the 7.2 per cent growth rate for the same period a year earlier and double-digit gains posted in previous years, according to the National Bureau of Statistics.
Ruan said that other economic indicators were “generally within our expectations”, adding: “Our judgment is that economic growth remains in a reasonable range.”
The Chinese central bank enjoys less independence than its overseas peers such as the US Federal Reserve.
The bank has enhanced communication with financial markets and tried to guide their expectations since Yi Gang became governor in March.
In a two-hour lecture delivered at Tsinghua University two weeks ago, Yi highlighted the dilemma now facing policymakers.
“Amid the downward pressure on the economy, [we] need a modestly loose monetary environment. But it cannot be too loose considering the need for external equilibrium. The [yuan] exchange rate will be affected if interest rates are too low,” he said.