Beijing Commits to Stable Monetary Policy, Will Firmly Resist “Irrigation” of the Chinese Economy

The Chinese central government has flagged a continuation of its ongoing theme of stable monetary policy in 2019 despite two cuts to the required reserve ratio in January that achieved a total reduction of 100 basis points.

“Certain monetary polices recently implemented by China have been assessed in general by external opinion, and in particular market entities, as positive, but there have been individual voices of doubt, who have asked whether or not this is quantitative easing,” said Premier Li Keqiang at an executive meeting of the State Council convened on 20 February.

“I will hereby reiterate that stable monetary policy has not changed and will not change…we will firmly refrain from ‘flood-style’ irrigation.”

According to Li the two reserve cuts in a single month are in line with strong calls from market entities, while China still retains ample room for reductions given that its reserve ratio is comparatively high for a major economy.

Li said that monetary authorities had also engaged in an appropriate retraction of liquidity during the process of reducing the required reserve ratio, while stressing the need to step up financial inclusion and support for the real economy.

“Relevant financial institutions must act in consonance and coordinate their efforts, and enable more loans to flow with greater ease to the real economy and small, micro and medium-sized enterprise,” said Li. “It is especially necessary to expand the vigour of medium and long-term lending, and use this to guide the stable operation and long-term improvement of the macro-economy.

Li also warned of the risk created by imprudent lending practices amidst efforts to shore up financial support for China’s real economy.

“After signalling a required reserve ratio cut, it would appear on the surface that there was a sizeable rise in total social financing, but detailed analysis discovers that this is mainly a comparatively rapid rise in bills financing and short-term loans,” said Li.

“This not only potentially triggers conduct such as ‘arbitrage’ and ’empty transfer’ of funds, as well as potentially brings new potential risk.

“The fundamental path for resolving the long-term dilemma of Chinese growth is comprehensive deepening of reform, the driving of high-quality growth, and using reform and structural adjustments to expedite improvement amidst stability for the economy.”

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