PBOC Warns of Asset Bubble “Landslide Dam” in Chinese Economy

Yi Gang (易纲) vice-governor of the People’s Bank of China, has outlined the chief concerns and challenges for the Chinese central bank in 2018 in an essay published by its official news publication.

The essay entitled “Retrospective and Outlook for Monetary Policy (货币政策回顾与展望) was published by PBOC’s China Finance on 30 January 2018, and warns that Chinese leverage remains high, as well as expresses concern about a “landslide dam” of asset bubbles in the economy.

Translated excerpts of the essay are included below.

“Looking at 2018, there are both opportunities as well as challenges. From an international perspective the global economy’s recovery continues, and the monetary policies of the main developed economies will further trend towards normalisation.

“The US Federal Reserve’s further rate hikes have caught the attention of people from all spheres, and the global interest rate centre is likely to rise. US tax reduction measures and foreign trade policies have also brought considerable uncertainty to the global economy.

“The incidence of geopolitical risk could increase, and the shocks this brings to international financial markets cannot be ignored.

“The improvement of external demand against a background of global economic recovery will play a definite support role for the domestic economy.

“However,the presence of uncertain variables externally could spread to the domestic economic and financial spheres, while global economic recovery and a rebound in commodities could also put significant pressure on domestic prices.

“Shifts in the monetary police trends of the main developed economies could also put a squeeze on our own policy space, increasing the difficulty of monetary policy operations.

“Looking at things domestically, following the continued deepening and implementation of supply side structural reforms,  political simplification and delegation, as well as innovation-driven strategies, the stability and coordination of China’s economic performance has further increased, and its quality and efficiency has risen.

“At present consumption and external demand are steady overall, the output capacity of the manufacturing sector can be cleared, while there have been marked increases to industrial concentration and improvements to enterprise profits.

“We can already see the trend of improvements to the quality of China’s economic growth, and optimisation of the economic structure, and forecast that in 2018 the Chinese economy can expect to maintain stable growth.

“However, we must also note that the economy continues to harbour certain problems and hidden dangers. Endogenous growth drivers require further strengthening, the path of structural adjustment remains hard and long, debt and leverage remain at high levels, warnings of a ‘landslide dam’ of asset bubbles still cannot be fully dismissed, financial malfeasance continues to exist, and the financial regulatory structure also awaits further improvements.

“Faced with this complex internal and external environment…we must retain risk awareness, and maintain constant vigilance.

“In 2018 the People’s Bank of China will use the economic thought of Xi Jinping’s new era of socialism with Chinese characteristics as its guide, and in accordance with the demands of high quality growth properly implement stable, neutral monetary policy, maintain rational, stable liquidity, improve an adjustment framework comprised of the twin pillars of monetary policy and macro-prudential policy, firmly defend the baseline against risk, actively promote financial reform, expedite optimisation of the loan structure…and continue to operate a neutral and appropriate monetary policy environment for supply side structural reforms and highly quality growth.”

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