Chinese Monetary Policy to Become More Targeted in 2019, Space for Several Reserve Cuts


Domestic analysts see Chinese monetary policy becoming more targeted and anticipatory in 2019, despite the overall theme of stability remaining unchanged.

The 2018 Central Economic Work Conference that closed on 21 December made reference to “appropriate adjustment to stable monetary policy, maintenance of rationally ample liquidity, improvements to monetary policy transmission mechanisms, increases in the share of direct financing, and effective resolution of the problem of financing being difficult and expensive for private enterprise and small and micro-enterprises.”

Analysts expect structured and targeted adjustments to monetary policy to become more pronounced next year, with room for further reductions in the required reserve ratio, yet little likelihood of an across-the-board rates cut or “flood-style” loosening.

A report from the Bank of Communications Financial Research Centre forecasts two to three cuts to the required reserve ratio for banks in 2019, as well as a higher likelihood of targeted reserve cuts.

For this reason lending rates are very likely to decline, yet given that benchmark rates are already at a historic low, there is little likelihood of a comprehensive drop in interest rates.

Dong Ximiao (董希淼), a senior researcher from the Chongyang Institute for Financial Studies at Renmin University, said to Economic Information Daily that while Central Economic Work Conference has no longer stressed “neutrality” or made mention of “effectively controlling the sluice gates of the money supply,” this does not signal a shift in monetary policy.

The Conference has continued to stress the need to “effectively prosecute the war for the prevention and dissolution of major risk.”

Dong said that given that high leverage is the root source of macro-economic and financial fragility, it is necessary to to continue to pursue supply-side reforms as well as implement structured deleveraging.

For this reason, monetary policy should “continue to maintain stability, firmly refrain from flood-style irrigation, and continue to guide financial resources away from low-efficiency areas.

“Only in this way will it be possible to win the war for the prevention and dissolution of major risk, and truly stride towards high-quality growth.”

Wen Bin (温彬), chief researcher with China Minsheng Bank, said to state-owned media that stable monetary policy has shifted from “the need to maintain neutrality” to “the need to be moderately elastic” in response to changes in economic conditions.

According to Wen from 2017 to the first half  of 2018 the Chinese economy was still in a state of “improvement and progress amidst stability,” and maintaing neutral monetary policy was capable of ensuring the rational growth of loans, while also satisfying the growth needs of the real economy, preventing financial risk and achieving structured deleveraging.

Since the second of 2018 however, China’s economy has “seen change amidst stability and worry amidst change,” which means that monetary policy needs to be more forward looking, and that the direction of adjustment needs to be “moderately elastic.”

Wen called for regulators to adopt counter-cyclical adjustments to “iron out” the negative impacts brought about by cyclical fluctuations in the economy.