State Media Flags Maintenance of Tight Monetary Policy Across Second Half

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China’s Xinhua News Agency has published a new editorial piece that presages the continued maintenance of stable monetary policy by the Chinese central bank across the second half of 2017, as regulators strive to deleverage the financial sector.

The editorial entitled “Second Half Monetary Policy Will Remain Steady” (“下半年货币政策将保持稳健”), written by Zhang Mo and published in Xinhua’s Economic Information Daily, notes that the maintenance of “stable and neutral” monetary policy in the first half of the year had a marked impact on financial deleveraging efforts, and that market observers expect no changes to the “basic tone” of policy across the second half of 2017.

Zhang notes, however, that the People’s Bank of China – China’s central bank, will strive to better balance macroeconomic liquidity as China’s financial regulators continue to pursue their financial deleveraging campaign.

PBOC has continuously slowed growth in the M2 money supply of late, with June marking the second consecutive month that expansion remained beneath the 10% threshold for a new historic low.

PBOC’s data indicates that China’s M2 money supply saw a year-on-year increase of 9.4% in June to reach 163.13 trillion yuan, for a decline in growth of 0.2 and 2.4 percentage points compared to May and June of last year respectively. 

The central bank has touted the decline in the M2 money supply as evidence of the success of China’s ongoing deleveraging campaign.

“Following the implementation of stable and neutral monetary policy as well as the manifestation of the effects of strengthened financial regulation, commercial banks have recently slowed the expansion of certain uses of capital in relation to off-balance sheet products, and as a consequence deposits and M2 growth rates have undergone corresponding declines,” said Ruan Jianhong, the head of PBOC’s surveying and statistics office. “This is the objective result of reductions in the internal leverage of the financial result.”

China’s policymakers have sent signals presaging the maintenance stable and neutral monetary policy by means of other channels.

The country’s Fifth National Financial Work Conference held over the weekend said that the prevention and resolution of systemic financial risk must be given greater emphasis, and pointed to the need for the “firm execution of stable monetary policy,” alongside the promotion of economic deleveraging.

On 17 July a meeting of PBOC’s party committee also reiterated the importance of maintaining stable and neutral monetary policy, alongside further standardisation and resolution of systemic risk and the strengthening of macro-prudential management and counter-cyclical adjustments.

Li Peijia, senior researcher with the Bank of China’s Institute of International Finance, said that given official preoccupation with deleveraging of the real economy a loosening of liquidity is unlikely, although the likelihood of further tightening of monetary policy is low, as circumstances do not favour a large-scale increase in rates.

“To the extent that it can, monetary policy will likely still remain unchanged in the face of myriad changes, and whether or not there are micro-adjustments will depend upon changes to liquidity at key times,” said Li.

“If market rates rise, the central bank will perhaps expand supplementation by means of open market operations.”

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