Coronavirus: China to keep monetary policy ‘normal as long as possible’ despite economic impact of Covid-19

People’s Bank of China (PBOC) governor Yi Gang believes ‘the impact of the pandemic is temporary’, meaning the large economic stimulus of the past is unlikely
The coronavirus pandemic has already plunged the world’s second largest economy into its first contraction since quarterly records began in 1992

Coronavirus pandemic

Frank Tangin Beijing

Published: 6:30pm, 27 Apr 2020

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China’s central bank chief has warned against excessive economic stimulus to offset the unprecedented shocks from the coronavirus pandemic, citing the already high risk accumulated in the country’s financial system.

Instead, People’s Bank of China (PBOC) governor Yi Gang said “the normal monetary policy should be kept as long as possible”.

The coronavirus pandemic has already plunged the world’s second largest economy into its first contraction since quarterly records began in 1992, and the market is divided on how to shore up the economy, although there is caution over re-enacting the 4 trillion yuan (US$572 billion) stimulus package used a decade ago amid the global financial crisis.

“The impact of the pandemic is temporary. China’s economy has strong resilience and great potential, while the fundamentals for high-quality development won’t change,” Yi wrote in an article published in the academic publication, Economic Research, on Sunday.

If the economic stimulus is too big, it could bring the risk of inflation and a fast increase in the leverage ratio

Yi Gang

China’s central bank has already loosened its monetary and credit stance to help combat the virus, including 1.8 trillion yuan (US$254 billion) to help virus-hit small businesses, trillions of yuan of liquidity injected to safeguard the financial markets, 7.1 trillion yuan of commercial bank loans in the first quarter, as well as multiple rate cuts to lower the cost of the real economy.

Despite the risk that the debt-to-gross domestic product (GDP) ratio could rise further amid the rescue plans, Yi said the ratio, which was assessed by the National Institution of Finance and Development to have risen by 6.1 percentage points to 245.4 per cent last year, should be kept “as stable as possible”.

“A balance between economic stabilisation and risk prevention must be struck to make a leeway for long-term sustainability of the economy,” he wrote.

“If the economic stimulus is too big, it could bring the risk of inflation and a fast increase in the leverage ratio. [We] must keep the normal monetary policy as long as possible to safeguard the strategic period for long-term development.”

The coronavirus outbreak has raised the possibility that China will miss its goal of building up a “moderately well-off society” by 2020, which requires a GDP growth rate of at least 5.6 per cent to double the size of its economy from 2020. In the first quarter, China’s economy shrank by 6.8 per cent, having grown by 6.1 per cent last year and by 6.0 per cent in the fourth quarter.

In response to the economic slowdown, China’s leadership has already mentioned economic countermeasures including local special purpose bonds, a higher deficit ratio and the use of special treasury bonds.

Scholars and advisers have also brought forwards a variety of suggestions, including a Chinese version of the modern monetary theory that would involve the central bank issuing as much yuan as it needed to remain solvent. I nfrastructure construction and trillions yuan of government consumer stimulus was also mentioned.

Chen Zhiwu, director of the Asia Global Institute of the University of Hong Kong, said that the Chinese government is under less pressure to launch a large-scale stimulus response than it was in February, when the country’s economic activities came to a standstill amid a nationwide lockdown.

“China’s decision-makers tend to wait and see for a while in the time of uncertainties,” he said.

“[However], governor Yi Gang, together with many others, refreshed our memory that there was once a big increase [after the global financial crisis] of leverage, particularly in local government financing vehicles and state-owned enterprises. It is certainly correct to [learn the lesson and] prevent another fast rise this time.”

Instead of a new stimulus package, Chen believes that more efforts should be made to improve existing policies that centre on large companies and the state sector, while also rolling out substantial support for the small businesses that are vital for employment.

Yi’s research indicates that China’s financial asset risk apparently became more concentrated on financial institutions and governments, a situation unsuitable for further big stimulus.

A better development of direct financing, particularly equity financing, can reduce the overreliance on bank loans, and therefore ensure that the financing support for the real economy will continue

Yi Gang

According to PBOC governor Yi, the size of financial assets which financial institutions and governments bear the risk reached 365.9 trillion yuan (US$52.7 trillion) and 118.7 trillion yuan respectively by end of 2018. This was 5.85 times and 2.6 times that of their levels in 2007, while the two combined accounted for 72.2 per cent of the risk weight.

As the national economy slows, some small banks are also under greater financial distress in the year after the central bank took over Baoshang Bank, while other state agencies took part in bailouts of Hengfeng Bank and the Bank of Jinzhou.

“Risk should be diversified and shared [among different parties],” Yi added. “A better development of direct financing, particularly equity financing, can reduce the overreliance on bank loans, and therefore ensure that the financing support for the real economy will continue.”

Yi, who is also a close aide to Vice-Premier Liu He, is a firm implementer of the de-risking campaign started in 2018 and the restructuring of the state-dominated financial system.

Although the deleveraging campaign was largely shelved amid the trade war with the United States, efforts to crack down on shadow banking activities and internet financing have continued.

“The development of direct financing fundamentally needs further reforms and opening-up,” he added, referring to the initial public offering (IPO) reform, the boost of private equity and the relaxation rules concerning foreign financial service.

This article appeared in the South China Morning Post print edition as: Keep monetary policy normal, PBOC chief urges

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