An academic from one of China’s leading research institutions forecasts another cut to the reserve requirement within the next six months following a “normalisation” of Chinese monetary policy.
In an article published by China Securities Journal Hu Yuexiao (胡月晓) a researcher from the China Financial Research Institute of East China Normal University, said recent changes in the monetary environment indicate that “loose money” shifted to “loose credit” in the second half of 2018, with finance providing greater support to the real economy and capital markets.
The move comes as the Chinese central government adjusts its deleveraging campaign and shadow banking crackdown following heightened trade tensions with the United States.
“Due to the impact of new financial regulatory policies, and the financial market standardisation and risk governance brought by new asset management regulations, the interbank market and shadow banking have met with a sizeable shock,” writes Hu.
“From May to July 2018 growth total social financing saw growth for three successive months that was lower than loan growth…[this] clearly indicates non-loan financing continues to contract.
“However the contraction of non-loan financing is not at all a contraction in direct financing, but a contraction in shadow banking…this clearly indicates that the decline in social financing is mainly the result of strengthened regulation, and embodies progress with regard to the policy goals of returning financing to balance sheets and ensuring that capital ‘avoids the empty and returns to the real’ that have continually been stressed in the past.”
Hu sees a strong likelihood of the People’s Bank of China (PBOC) implementing another cut to the required reserve ratio in early 2019.
“Another reserve ratio cut by the central bank within the next 3 – 6 months remains a highly probable event,” writes Hu.
“The monetary authorities have increased the use of reserve cuts within their policy portfolio, causing the operation of monetary policy to shift towards – – ‘contracting the short and extending the long,’ for improvement to the monetary structure.
“It is expected that in future the improvement trend of extending the maturity of China’s base money supply structure will continue, and the support role played by finance with regard to the economy will further strengthen…improvements to the monetary environment will be of benefit to creating the necessary conditions for the economy and capital markets to improve amidst stability.”