China central bank says no need for easing after tariff hike
- People’s Bank of China says Chinese economic fundamentals ‘remain solid’
- Ready to ‘fine-tune’ monetary policy in response to changes in economic and financial data
The People’s Bank of China (PBOC) indicated on Friday that it saw no reason to undertake a major easing of monetary policy as a result of the increase in US tariffs on Chinese imports.
Instead, the central bank gave an optimistic interpretation of April lending and credit data and expressed confidence that its deep policy toolkit could address all market contingencies.
The upbeat assessment defied market concerns about the country’s economic outlook, coming just hours after the US raised tariffs on US$200 billion worth of Chinese merchandise from 10 per cent to 25 per cent.
The PBOC made clear it aimed to anchor market expectations and address the constant guessing over whether monetary policy would be loosened more to address a potential further slowdown in Chinese growth.
“Our monetary approach has not changed based on current overall and structural data,” Sun Guofeng, director of the PBOC’s monetary policy department, said at the media briefing on Friday afternoon.
While the central bank would continue to pursue a prudent monetary policy, it would also properly manage money supply and fine-tune policies according to changes in economic growth and inflation, Sun said.
“As for the change in the domestic and external economic environment, China has sufficient leeway and a deep monetary policy toolkit, and so has full ability to deal with [economic] uncertainties,” he said.
The revival of Sino-US trade tensions in the past week has roiled global financial markets and raised concerns that the Chinese economy could experience a renewed slowdown without additional fiscal and monetary stimulus.
Zhou Xuedong, the central bank’s spokesman and general office director, said the trade war’s biggest impact had been on market expectations rather than on the real economy.
“It eventually depends on how our economy functions, about which we have full confidence. China’s economic fundamentals – as reflected in the economic growth rate, the consumer price index, the producer price index and financial data – remain solid,” he said.
Ma Jun, a Tsinghua University professor and also a monetary policy adviser to the PBOC, calculated that Friday’s tariff hike would shave only 0.3 percentage point from China’s growth rate and so the impact was “controllable”.
The PBOC’s assessment of April lending data was more optimistic than that of many analysts, who pointed to the larger-than-expected monthly drops in new bank lending and total aggregate financing, two key indicators measuring monetary policy support for the real economy.
New yuan loans dropped to 1.02 trillion yuan in April from 1.69 trillion yuan in March, while national aggregate financing, a broad measure of credit to the real economy, dropped to 1.36 trillion yuan in April, less than half of the 2.86 trillion yuan a month earlier, according to PBOC data released a day earlier.
Sun said month-on-month comparisons were usually distorted by seasonal factors and so the data should be evaluated over a longer period, such as using a 12-month moving average or year-to-date accumulative figures.
April credit growth was relatively good and would continue to grow steadily in the future as lending constraints eased, he said. “Credit demand is still robust,” he added.
On Monday, the central bank made the unexpected announcement that it had freed up 280 billion yuan of funds that could be lent to small firms by cutting the required reserve ratio for rural commercial banks. The central bank attributed the cut to its ongoing efforts to set up a three-tier reserve requirement framework to help smaller banks and companies, and not to US President Donald Trump’s threat the day before to raise tariffs on Chinese imports.
The central bank has also refrained from large liquidity injections since early April, saying the current liquidity level in the interbank market is “relatively high”.
Song Houze, a research fellow at the Paulson Institute, said the monetary tightening since April reflected the central bank’s struggle to balance its support for growth while continuing its deleveraging campaign to reduce debt and risky lending.
However, “the tightening will be short-lived and unlikely to last beyond May, particularly if the trade war meaningfully escalates yet again,” he wrote in a note.
The Chinese trade delegation, led by Vice-Premier Liu He, is due to hold a second day of negotiations with its US counterparts in Washington on Friday in an attempt to reach agreement on a deal to end the trade war.
The Ministry of Commerce repeated earlier on Friday that it would take “necessary countermeasures” in response to the US move to increase tariffs, but did not provide details.
