Fudan U. Economist Calls for China to “Intensify” Monetary Policy in Second Half


One of China’s leading economists has called for the central bank to ply more active monetary policy in the second half in order to deal with market headwinds and uncertainty, given that the Chinese economy has thus far been spared from the breakneck inflation afflicting many other major economies.

Dong Ximiao (董希淼), head of Fudan University’s Financial Research Institute, said that in the near term monetary policy should “intensify implementation across multiple areas,” as well as “more firmly uphold the focus on our own priorities.”

Dong made the remarks in an opinion piece published by Cebnet.com.cn, just following release of the People’s Bank of China’s (PBOC) second quarter monetary policy execution report, as well as a decline in the scale and pace of lending in the month of July.

The contraction in July credit extension prompted PBOC to reduce the policy rates for its 7-day reverse repos and its 1-year medium-term lending facilities (MLF) by 10 basis points at the start of this week.

In the opinion piece Dong flags more active use of monetary policy tools by PBOC, particularly given that inflationary pressures in China are far weaker compared to other major economies.

“The [monetary policy execution] Report places a high degree of emphasis on inflation…but it also contends that at present full year price levels in China will maintain overall stability,” wrote Dong.

“At present China’s price conditions are different form those of European and North American countries, and future inflationary pressure will not at all be large.

“The current round of economic inflation in Europe and North America is mainly due to stimulus of economic growth and the adoption of loose monetary and fiscal policies, leading to excess aggregate demand, and a comprehensive rise in the price of goods.

“However, in recent years China’s monetary policy has been comparatively stable, market liquidity has remained rationally ample, and we have not implemented flood-style irrigation…July data indicates that CPI rose 2.7% YoY, lower than consensus market expectations.”

For this reason Dong expects the future to see a “shift in thinking,” and greater efforts to balance stable growth with inflation prevention.

“Stabilisation of growth is the primary target,” Dong wrote. “Macro-policy must increase in intensity, and we must take active action to increase demand.”

Dong expects China to “expand the intensity of monetary policy implementation” across four fronts, including:

  1. Making effective use of qualitative tools to maintain moderate growth in the money supply, and strengthen stabilisation of the growth in lending volumes. “At present the weighted average reserve ratio of China’s financial institutions is 8.1%, and there is still room for further downward adjustment…at the same time, guiding the loan prime rate (LPR) and in particular the 5 year LPR downwards moderately will stimulate enterprise demand for medium-and-long term financing.
  2. Greater emphasis on the role of structured instruments. “We should expand targeted blood infusions to key industries and areas, and optimise the loan structure. The [Monetary Policy Execution Report] has established a column on the evolution and trends in the lending structure, to place greater emphasis on adjustments to the credit structure. We should effectively make use of targeted reserve requirement reductions and financial inclusion micro-and-small loan support tools.” Dong also called for increases in the share of loans for financial inclusion, tech innovation and green development, in order to “compensate for declines in real estate loans.”
  3. Expanding the intensity of adjustment to real estate financing policies. “We should better support the stable and healthy development of the real estate market, and accelerate adjustments and optimisation of real estate financing policies…with regard to home loans, we can reduce the down payment ratio and loan interest rates, and explore the unveiling of three home loan polices in third and fourth-tier cities.”
  4. Further clear out monetary policy transmission mechanisms. “We should expand the effective transmission and positive incentives for financial institutions, and appropriately loosen macro-prudential assessments (MSA) to raise the willingness of financial institutions to extend loans.” Dong also called for small and medium-sized banks to loosen application conditions for reloans to support agriculture and small businesses, as well as channels for small and medium-sized banks to supplement their capital, including the issuance of perpetual bonds and convertible bonds. “We should give preferential support to the listing of small and medium-sized banks, expand channels for the disposal of non-performing loans, and strengthen the capital strength and healthy development capability of small and medium-sized banks.”