China’s Monetary Policy to Shift from Adjustment to Control of the “Sluice Gate”


Analysts contend that key changes in the phrasing used by China’s Central Economic Work Conference for 2017 could signal a shift towards more assertive monetary policy in the upcoming year.

The Central Economic Work Conference, held in Beijing from 18 – 20 December, has reiterated the Chinese government’s firm stance on curbing systemic financial risk.

The Conference stressed the need to “properly prevent and resolve key risk over the next three years…with a focus on the prevention of financial risk,” while also emphasising that the key theme of monetary policy would be “steadiness.”

Market observers also note key changes in the phrasing used by the Conference in its account of monetary policy.

“Steady monetary policy must preserve neutrality, control the main sluice for the money supply, maintain rational growth in the scale of monetary credit and social financing, preserve the fundamental stability of the RMB exchange rate at a rational, balanced level, expedite the healthy development of a multi-tier capital market, better service the real economy, and guard the bottom line against the onset of systemic financial risk,” said the Conference.

This year’s phrasing removes reference to “new changes in response to monetary supply methods,” and maintaining the basic stability of liquidity,” while adding reference to “maintain[ing] rational growth in the scale of monetary credit and social financing.”

It also replaces the phrase “properly adjust the monetary sluice” with “control the main sluice for the money supply.”

Lu Zhengwei, chief economist of Industrial Bank, said to 21st Century Business Herald that this change in phrasing indicates that Beijing will continue to place heavy emphasis upon macro-economic deleveraging in 2018.

“At present leverage rates are already comparative high, and for this reason growth in the volume of debt must be controlled,” said Lu.

“The mention of monetary policy alongside support for a multi-tier capital market and servicing the real economy indicates that [China] will continue to deleverage using the financial stability commission framework, and not only control loans and social financing, but also make recourse to direct financing via a multi-tier capital market.”

Lian Ping, chief economist of the Bank of Communications, said that neutrality will be the key theme of upcoming monetary policy, and that prevention of systemic financial risk will be the key mission in future.

Lian expects financial leverage ratios to fall to a “rational” level, but that further tightening is unlikely given that the People’s Bank of China will make greater use of macro-prudential assessments and micro-controls to regulate the market.

“Under such circumstances further tightening of monetary policy is inappropriate…the emphasis on neutrality takes precedent over this.

“Additionally, there will definitely be no ‘watering’ (monetary expansion), because of the need to deleverage.”

According to Lian there are four vectors of financial risk that will preoccupy policymakers in the near future – the first is the prevention of systemic financial risk, while the second is the excessive “zeal” and lack of standardised conduct amongst certain financial institutions, with many previously engaging in unlicensed online micro-lending, for example.

The third is general operations risk, including financial holding companies, while the fourth is liquidity risk.

“Financial deleveraging is already being done, for example control of shadow banking, interbank operations and off-balance sheet business, and we need to continue to advance in this direction,” said Lian.

“With respect to general operations, we must make haste to establish a reciprocally matched regulatory framework; regulation of micro-financing is currently in the process of progressing, and I believe that action will rapidly be taken in this area.

“Liquidity requires that monetary policy remain stable.”