China Must Maintain Neutral Monetary Policy, Avoid Excessive Loosening: Ex-IMF Official Zhu Min

One of China’s top economists has called for the central bank to stay the course when it comes to monetary policy.

Zhu Min (朱民), head of the Tsinghua University National Finance Research Institute (清华大学国家金融研究院), said to Sina that China must focus on maintaining neutral monetary policy and cannot pursue “excessively loose” monetary policy.

Zhu, formerly a Deputy Managing Director of the International Monetary Fund and a Deputy Governor of the Chinese central bank, made the remarks at the sidelines of the Davos 2020 World Economic Forum.

According to Zhu the main challenge that Chinese monetary policy faces at present is “ensuring that liquidity can flow towards the real economy.”

“From a monetary policy perspective it should be neutral, but because China’s overall debt ratio is still very high, we also cannot excessively loosen monetary policy,” said Zhu.

“What we need to focus on more is transmission mechanisms for monetary policy, and enabling liquidity to flow into real economy, instead of finance or real estate.

“Monetary policy must thus become more flexible and operation must be more detailed. I feel that this is the content and direction of monetary policy in the new year.”

With regard to potential cuts to China’s reserve ratio, Zhu said that the currently level is still quite high, and that there is room for further reductions which should be targeted in nature.

“(Reserve ratio cuts) can serve as an operational tool for structural adjustments,” Zhu said.

Zhu said that other major issues for the Chinese economy that could have a fundamental impact on monetary policy transmission include:

1. Aging of the population – “the scope and space of ageing far exceed our imagination…aging will cause investment to decline, and can also cause investment demand amongst the elderly to increase.”
2. Climate change, which will lead to changes in vehicle and energy demand.
3. Technology, with artificial intelligence and 5G making large-scale digitisation of industry a real possibility for the first time.

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