One of China’s leading financial news outlets says the Chinese central bank is unlikely to follow the lead of the US Fed when it comes to balance sheet shrinking, although the country’s deleveraging campaign is on track to moderate.
The US Fed recently made the landmark decision to unwind the massive stimulus program launched in the wake of the Great Financial Crisis, by reducing its $4.5 trillion portfolio of bonds and securities at an initial rate of $10 billion per month starting in October.
According to Securities Daily the People’s Bank of China has already started to shrink its own balance sheet in advance of the Fed, as part of Beijing’s ongoing deleveraging drive.
“The deleveraging measures adopted by China include structural adjustment and optimisation of the central bank’s balance sheet,” writes Yan Yue (阎岳).
“With respect to the issue of balance sheet shrinking, PBOC has undoubtedly moved in advance of the US Fed…from the end of January to the end of March this year the central bank shrank its balance sheet by 1.1 trillion yuan for a 3% reduction.
“The latest public data from the central bank indicates that as of the end of August the balance sheet of China’s monetary authority was 34.7144 trillion yuan, for a reduction of 346.6 billion yuan compared to the end of July, while fiscal deposits fell by 532.3 billion yuan, for another balance sheet contraction after March.
Yan points out, however, that a key difference between recent balance sheet contractions of PBOC and the Fed is that the former have been passive responses to circumstance.
According to Yan China’s balance sheet contractions are usually the result of changes in fiscal deposits, as well as foreign exchange shifts and seasonal factors.
As a consequence Yan does not expect PBOC to follow the lead of the US Fed when it comes to portfolio reduction, given that its chief priority remain the maintenance of stable and neutral monetary policy.
PBOC may also seek to moderate the intensity of China’s ongoing deleveraging campaign.
“While stabilising the results of the initial period of deleveraging, [China should] continue to adopt comparatively moderate methods to effectively allocate financial resources to the real economy, thus completing supply-side structural reform of the finance sector…
“Although the US Fed has released an active plan for balance sheet contraction, we should still continue to perform deleveraging work in accordance with the established rhythm, and make the prevention of financial risk a greater priority.”
Yan also points to divergences of opinion within policymaking circles on the monetary policy tools that should be employ in future, chiefly concerning whether the reserve ratio should be further reduced.
While it’s generally acknowledged that there is room for a reduction in reserve ratios, some observers contend that such a move would send too emphatic a policy signal, which is in any case unnecessary given the recent alleviation of liquidity concerns.
Other observers argue that a reserve ratio reduction when appropriate would provide more ample liquidity to financial institutions, and upgrade their ability to service the real economy.