Chinese Central Bank Says Monetary Policy Can’t Do It Alone, Fiscal Vigour Needed

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An opinion piece published by the Chinese central bank’s official news publication has advocated the adoption of more vigorous fiscal policy, arguing that monetary policy alone is insufficient to maintain the health of the economy.

The piece entitled “Responding to Credit Tightening – Monetary Policy Will Find It Hard to Go Alone, Fiscal and Regulatory Urgently Need to Exert Vigour” (应对信用收缩 货币政策“独木难支” 财政、监管政策亟须发力) by Li Guohui (李国辉) was published by the People’s Bank of China’s (PBOC) official publication “Financial News” (金融时报) and widely recirculated by the domestic press.

The publication of the piece arrives in the wake of a rare public spat between senior Chinese officials from PBOC and the Ministry of Finance over the extent to which fiscal policy should be deployed by Beijing.

“Looking at monetary policy, since the start of the year the central bank has implemented three reserve ratio cuts, as well as used tools such as medium-term lending facilities (MLF) to release approximately 2.8 trillion yuan in medium and long-term liquidity, far ahead of the total sum of 1.76 trillion yuan for all of last year,” writes Li.

“In the second quarter a regular meeting of the central bank’s monetary policy committee shifted its liquidity target from ‘rationally stable’ to ‘rationally ample.’ Against this background, funds on the interbank market continue to be loose, and money market rats have fallen to a near year-long low.

“However, financial data is not as expected. M2 and total social financing growth has remained weak or even diverged.

“As of the end of June this year M2 year-on-year growth was 8.0%, for a slide of 0.3 percentage points compared to May, hitting a new historic low.

“In June total social financing was 1.18 trillion yuan, for a YoY decline of nearly 600 billion yuan. For the period from January to June total social financing was 9.1 trillion yuan, for a reduction of 203 trillion yuan compared to the same period last year.

“Chen Jianheng (陈健恒), fixed-income analyst with China International Capital Corporation, describes the aforementioned liquidity conditions as ‘broad definition tight, narrow definition loose,’ meaning that strict regulation has caused a reduction in the release of assets by financial institutions, a corresponding reduction in derived deposits, and a gradual tightening in broad liquidity.

“At the same time however, monetary policy has loosened, narrowly defined liquidity has improved, and money market rates have started to fall from their high levels at the start of the year.

“‘The continuation of the situation of broadly defined liquidity tightening and narrowly defined liquidity loosening means that reliance upon stimulus using traditional monetary policy will be of no help for improving the current situation of a decline in risk preferences amidst strict regulation’ said Chen Jianheng.”

According to the article there is still “considerable room to manoeuvre for vigorously employing fiscal policy.”

“Looking at public finance expenditures and receipts, as of the second quarter of 2018 national public financial revenues saw YoY growth of 10.6%, yet national public financial expenditures grew by 7.8% YoY.

“Looking at the deficit ratio, in 2018  the fiscal deficit ratio was 2.6%, less than the deficit ratio of 3% over the preceding two years.”

CITIC Securities fixed-income analyst Ming Ming (明明) is quoted as saying that “whether it’s public fiscal revenue growth exceeding public fiscal expenditure growth in the first half of this year, or arrangements for the deficit ratio to fall in 2018, the room for vigorous employing of fiscal policy is still quite large.”

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