Frontrunner for PBOC Chief Pens Essay on Chinese Monetary Policy Outlook

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The man tipped to succeed Zhou Xiaochuan as the head of the People’s Bank of China has published an essay that addresses challenges and policy considerations for Chinese monetary policy in 2018.

The Wall Street Journal has just reported that Yi Gang (易纲), deputy governor of PBOC, is slated to become head of the Chinese central bank once Zhou Xiaochuan retires this year following a 15-year tenure.

Chinese online media outlets such as Sina are now circulating an essay written by Yi on the topic of monetary policy in 2017 and 2018, which was originally published by PBOC’s flagship new publication.

Excerpts of the essay entitled “Looking Back on 2017 Monetary Policy Work” (对2017年货币政策工作的回顾) are included below.

“Looking at the outlook for 2018, there are both challenges and opportunities. Internationally, the recovery of the global economy will likely continue, with the main developed economies further normalising their monetary policies, further rate hikes by the US Federal Reserve drawing the attention of the world, and global interest rates potentially rising.

“US tax cut measures and foreign trade policies will bring considerable uncertainty to the global economic situation, geo-political risk could flare up frequently, and it will be hard to overlook its impact upon international financial markets.

“The changes in trends for the monetary policy of main developed economies will put a definite squeeze on our policy space, increasing the difficulty of monetary policy operations.

“Looking at things domestically, following the continued deepening and implementation of supply-side structural reforms, simplification and delegation of governance and innovation-driven strategies, the stability and coordination of the Chinese economy’s performance is further strengthening, and its quality and efficiency is rising.

“At present consumption and external demand at stable in general, manufacturing output is being cleared, while increases in industry concentration and improvements to corporate profits are pronounced.

“We can already see that a trend of increases in the quality of Chinese economic growth and optimisation of the economic structure, and expect that in 2018 the Chinese economy can expect to maintain stable growth.

“However, it must also be acknowledged that there exist certain problems and hidden perils in the economy, with endogenous growth drivers still in need of strengthening, the path of structural adjustments still long and difficult, debt and leverage levels still high, and the ‘avalanche barrier’ of asset bubble warnings still in place.

“Financial malfeasance continues to exist, and the financial regulatory framework is in need to further improvement.”

Yi Gang’s essay outlines four key themes for Chinese monetary policy moving ahead:

1.Maintaining stable and neutral monetary policy, controlling the main sluice gate of the money supply, and maintaining rational growth in money, credit and total social financing.

“[China] can no longer rely on the flood irrigation of money and credit to drive economic growth…monetary policy must remain stable and neutral, in order to create conditions for a shift in growth methods, optimisation of the economic structure, and a change in growth drivers.”

2. Improving the twin pillars of the control framework – monetary policy and macro-prudential policy.

“Macro-prudential policy is a beneficial complement to monetary policy, and the coordination and supplementation of both can effectively address systemic financial risk, for better integration of currency stability and financial stability.”

3. Appropriately employing the structural guidance role of money and credit policy, further optimising the credit structure

“Under the pre-condition that overall volumes are effectively controlled, monetary policy can play a definite assisting role to the appropriate use of structural tools to drive adjustments to the economic structure.”

4. Continuing to appropriately drive forward various financial reforms, and fully exploit the decisive role of the market in resource allocation.

“Interest rate marketisation reforms are one of the core contents of financial system reforms, and of benefit to raising the competitiveness of the financial sector and strengthening the resilience of the financial system, creating beneficial conditions for changes to the monetary policy adjustment framework.

“Further progress in interest rate marketisation reforms is of major significance to the optimisation of resource allocation.

“The People’s Bank of China will further drive interest rate marketisation reforms, raise the efficiency of financial resource allocation, and improve financial adjustment mechanisms.

“The People’s Bank of China will continue to deepen reforms of renminbi exchange rate formation mechanisms, improve the foundation for market supply and demand, implement an adjusted, managed floating exchange rate system with reference to a basket of currencies, expand the force of the market’s effect on exchange rates, strengthen renminbi exchange rate flexibility, and maintain the stable position of the renminbi exchange rate in the global monetary system.”

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