China Signals Stronger Pro-growth Policy Stance
More signs pointing to stronger pro-growth monetary and fiscal policies have emerged after two days of meetings in Shanghai between financial ministers and central bankers of G20 economies, which concluded Saturday.
The growth-supportive policy stance was reinforced as the central bank announced on Monday it would lower the RRR (reserve requirement ratio) for commercial banks by 0.5 percentage points, the first such cut this year.
While central bank governor Zhou Xiaochuan shifted the tone on monetary policy from “prudent” to one of “easing bias,” Finance Minister Lou Jiwei saw more room to further expand fiscal policy and predicted increased budget deficit this year.
The fresh signs come ahead of China’s annual parliamentary session, which begins Saturday and will pin down economic targets and sketch out key economic policies for the world’s 2nd largest economy.
The shift of tone on monetary policy, which has been characterized as “prudent” since Y 2011, brings policy language in line with reality, Bloomberg economist Tom Orlik wrote in a research note.
To arrest the economic downturn resulting from a painful transition to a more sustainable growth model, China has cut interest rates and the reserve requirement ratio of banks several times since Y 2014.
Qu Hongbing, HSBC chief China economist, said that the new description of monetary policy chimes with the ongoing easing of monetary conditions since last year.
The People’s Bank of China (PBOC) injected more than RMB 1.5-T (US$229-B) into the market in January via open market operations, including medium-term lending facility and the standing lending facility, while also pledging supplementary lending operations.
For possible Southside risks, China still has the space and tools for monetary easing, the central bank governor said on the sidelines of the meetings in Shanghai.
“Our interpretation is that there is still room and space for use of low-profile tools like the medium-term lending facility to guide loan costs down, and the need to avoid selling pressure on the yuan will make it more difficult to cut benchmark rates in the short term,” Mr. Orlik noted.
The change in tone echoes policy guidelines set at China’s economic work conference in December, which required the pro-active fiscal policy to be “more forceful” and the prudent monetary to be “more flexible.”
“The PBOC has a broad enough toolkit to ease monetary conditions in a variety of ways,” said Qu of HSBC in a research note.
However, the easing to be applied in Y 2016 will not be a “one size fits all,” as the central bank will “seek to strike a balance between monetary accommodation and the need to facilitate structural reform,” Qu added.
While monetary easing seems to be gaining traction, officials have also signaled higher priority on further fiscal expansion to counter the downturn.
China still has room to expand fiscal policy to push structural reforms, the finance minister said on the sidelines of the meetings, predicting an increase in budget deficit this year.
A proactive fiscal policy has been the official line since the global financial crisis, but recent policies showed more tolerance of deficit.
Fiscal spending growth in Q-4 of Y 2015 accelerated to 14.7% Y-Y, with fiscal deficit expanding 23.3% Y-Y, according to the data.
China raised its budget deficit to 2.3% of GDP in Y 2015, up from 2.1% in Y 2014. A 3% deficit ratio is normally considered the line not to be crossed.
But director of the central bank’s surveys and statistics department Sheng Songcheng last week suggested that China could raise the ratio to 4% of GDP or even higher.
“The 3% warning does not fit with China’s reality,” Sheng said, citing China’s relatively small outstanding debt, rational structure, continued growth in fiscal revenue and solid assets of state firms.
UBS economist Wang Tao also believes more fiscal policy options are still available in China, saying that government debt levels remain moderate and manageable; there is still room to build more infrastructure and improve the safety net; and domestic savings are high enough to finance government borrowing.
Qu at HSBC expects larger fiscal spending will be used to cushion the impact of restructuring in sectors struggling with overcapacity, promoting industrial upgrading and infrastructure investment.
“Judging by the tone of the recent discussions, a deficit target of anywhere between 4 to 5% of GDP is certainly possible,” Qu wrote in a research note on previewing China’s Y 2016 economic policies on Sunday.
Stay tuned…
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Paul Ebeling
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