Central Bank Says No Further Tightening of Monetary Policy Lies Ahead


An essay published by the Chinese central bank’s flagship news outlet “Jinrong Shibao” indicates that it will neither significantly loosen nor tighten monetary policy in the second half of 2017, given the preliminary impacts of Beijing’s ongoing deleveraging campaign.

The essay by Lian Ping, chief economist of the Bank of Communications and a member of Jinrong Shibao’s specialist expert committee, foresees stable growth across the rest of 2017 following the economy’s strong performance in the first half.

“Although it will be difficult to continue to push economic growth higher, there are no concerns about the risk of flagging growth prior to the year’s end,” writes Lian in the essay entitled “Monetary Policy Should Not Be Further Tightened” (货币政策已不宜进一步收紧).

“[We] forecast that in the second half of the year economic growth will remain stable. Expediting stable economic performance and avoiding a hard landing for the economy is the baseline for macroeconomic policy this year.”

For this reason Lian says that in the second half “the basic tone of stable, neutral monetary policy should not be changed…given proper and equal consideration to the three targets of stable growth in the real economy,  coordinated financial deleveraging and overall control of financial risk.”

Lian notes that China’s deleveraging efforts are beginning to take effect, and that “based on the pronounced tightening of liquidity and increases in money market rates, and even the beginning of gains in bank loan rates, monetary policy should not be further tightened.”

“At this time the core of monetary policy perhaps needs to focus more on stable growth in the real economy,” wrote Lian. “Under situations where there is downward pressure on the economy in the second half, financial macro-adjustments will require the launch of counter-operations that have a stabilising quality, and the implementation of active, timely and appropriate buffers to reduce the pressure on the real economy caused by rises in financing costs.”

Easing property investment a key source of economic headwind in the second half

According to Lian the main source of pressure for the Chinese economy in the second half will be flagging investment, with a weakening in the relevant indices for commercial property sales, land transactions and construction starts, and drop in property development investment growth as a result of policy restrictions.

“In the second half of the year real-estate control policies are unlikely to see pronounced loosening, with the maintenance of strict controls on hot-spot cities, leading to uncertainty in market demand under heavy policy pressure, and continued year-on-year declines in completed transactions.

“Restrictions on the primary finance channels for real estate concerns could tighten, which will lead to a thinning of growth in invested capital, with declines in both the scale and percentage share of mortgage loans.”

Central government will continue to tackle local government debt

Efforts to curb local government financing and rampant growth in local government debt levels could also drag on growth in the second half.

“Strengthening of the regulation of finance platform companies, strict prohibitions on the use of PPPs and various forms of government investment funds by local governments to covertly raise funds in breach of laws and regulations, as well as downgrading of the credits ratings of certain local government financing platforms by international ratings agencies, could all restrict the financing capability of local governments.

Consumption set to hold steady, financial deleveraging could hamper real economy

Lian sees consumption holding steady in general across the second quarter, with a number of factors nonetheless potentially impact growth.

Growth in demand on the vehicle market is gradually flagging following an increase in the passenger vehicle ownership rate of households, while vehicle-related consumption growth has passed its peak.

Financial deleveraging could have an impact on the real economy by affecting the availability and cost of financing for companies, with Lian anticipating a marked rise in corporate financing costs during the second half, whose scope will likely be at least equal o a one-time hike in the prime rate.

This rise in financing costs will probably be acceptable to companies, however, given the sizeable increase in corporate profits this year, although some mid and down-stream companies, as well as traditional companies and micro enterprises, could come under pressure.

According to Lian financial deleveraging will have a direct impact on the contribution made to economic growth by the added value of the financial sector, which has risen from 4.54% of GDP in 2006 to 8.35% in 2016.