Chinese Monetary Policy Expected to Remain Stable, Structurally Targeted in 2022, Further Reserve Cuts Still Possible

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Domestic analysts forecast the maintenance of stable monetary policy with the diversified targeting of key economic segments, following statements made by top policymakers at China’s Central Economic Work Meeting held in December.

The Central Economic Work Meeting held from 8 – 10 December in Beijing called for “stable monetary policy that is flexible and moderate; the maintenance of rationally ample liquidity, and the guidance of financial institutions in expanding their support for the real economy, and in particular micro-and-small enterprises, tech innovation and green development.”

The meeting also called for “firmly restraining new growth in the hidden debt of local government.”

Domestic analysts say that the meeting marks a continuation of the basic themes of last year’s central economic work meeting, which stressed “flexible targeting.”

Li Qilin (李奇霖), head of Hongta Securities Research, said that monetary policy in 2022 will continue to remain “diversified.”

“On the one hand traditional sectors such as real estate and infrastructure will tend towards tightening, and any loosening will only be directed towards risk prevention, and for stabilising outstanding debt,” said Li to 21st Century Business Herald. “Further increases will be firmly contained however.

“On the other hand, structurally loosened monetary policy to support micro and small-enterprises, tech innovation and green development will continue to deepen and extend.

“Structured monetary policy tools such as relending, targeted reserve cuts and carbon emission reduction support instruments could continue to be implemented next year.”

Li points out however, that if monetary policy is only loosened on the structural basis outlined, growth in social financing will remain constrained to a range of between 10.5% – 11%.

Wang Qing (王青), chief macro-analyst with Golden Credit Rating, said that “marginal loosening” will be the general theme for the first half of 2022, with some likelihood of continued cuts to the reserve ratio, and modest reductions in policy rates when required.

Should growth drivers strengthen by the second half of 2022, Wang also sees the possibility of marginal tightening of monetary policy, and an increase in market rates.

“The two reserve ratio cuts in July and December do not cover institutions with ratios of 5%,” said Zhou Guannan (周冠南), chief fixed-income analyst with Huachuang Securities.

“The central bank has also stated that based on considerations of financial stability for a developing economy, 5% is already considered a lower reserve level.

“The current weighted 8.4% average reserve ratio is still quite some distance from 5%, and there is ample room for reserve ratio cuts for large-scale and medium-sized institutions. Next year, if policy hedging pressure is large, there is still the possibility of reserve cuts.”

Two reserve ratio cuts implemented by the Chinese central bank in July and December have brought the weighted average reserve ratio for Chinese financial institutions down to 8.4%.

At present the rates for the Chinese central bank’s one-year medium-term lending facilities and 7 day reverse repos are 2.95% and 2.2% respectively, having remained stable throughout 2021.