In the recent quarterly meeting of its monetary policy committee, the People's Bank of China (PBoC) summarized the implementation of monetary policy in the first half of the year. At the same time, the market is concerned about the PboC's judgment of the economic situation and the changes in monetary policy. Researchers at ANBOUND noticed that while the monetary policy trend in the general direction still adheres to the policy framework of aggregate and structure, some of the "flexibility" and "forward-looking" adjustments are worth watching.
With the increasingly complicated economic and financial situations both within China and globally, more uncertainties are emerging. China is feeling the triple pressure of demand contraction, supply shock, and weakening expectations. Adding to the existing issues are global economic slowdown and high inflation. This means that the effect of external changes on the country's domestic situation has further increased, exerting an inescapable impact on its demand and supply.
Researchers at ANBOUND believe that these shocks lie in several aspects. First, inflation is running at a high level, pushing up energy and raw material prices. This, in turn, increases the pressure on the domestic price level. Since last year, China's PPI index has maintained a high growth rate. Although there is a recent decline due to the impact of the COVID-19 outbreaks, the related factors on terminal consumer prices have always existed in the country. In the second half of the year, geopolitical risks have intensified and become increasingly complex. Under such circumstances, energy, raw materials, and food supply and demand may be out of balance. At the same time, in the context of global economic slowdown and industrial chain adjustment, external demand will also undergo corresponding shifts. Naturally, this will affect China's own economic recovery and growth. Coupled with the tightening policies of major central banks such as the Federal Reserve, there will be both direct and indirect impacts on the stability of the RMB exchange rate and the stability of the capital market. The brunt of these external changes on China is becoming more pronounced as the pandemic subsides. For China to resume its production and work towards recovery now, it is bound to face these risks.
Unsurprisingly, inflation has become the focus of the monetary policy. In the content of the PBoC meeting, price stability has also been repeatedly emphasized, and noteworthily it also mentions "stabilizing employment and prices", "steadily increasing food production", as well as "maintaining the stability of price level under the favorable conditions of steady energy market operation". This signifies that the possibility for the Chinese authority to launch a comprehensive easing of monetary policy in the future is still very low, and the implementation of aggregate policy still has its limitation. On the one hand, it is constrained by changes in external policies and the economic environment. On the other hand, when a new round of domestic pig cycles is about to begin, the trend of rising price levels may be highly possible. Such a situation also indicates that the room for further easing is limited, while the requirements for flexibility and precision in the implementation of aggregate policies will be higher.
Regarding the limitation of total easing, although the central bank emphasizes the balance between employment and inflation, it does not mean that the policy will be tightened. Instead, it still emphasizes the matching of monetary issuance and nominal GDP growth. That being said, many have noticed that the content of "maintaining the stability of macro leverage ratio" was removed from the meeting, making the trend of aggregate policy show some contradictory signs.
This begs the question if the policy will be "deleveraging" or "leveraging" in the future. From its repeated emphasis on "maintaining a reasonable and sufficient liquidity and enhancing the stability of the growth of total credit", it can be seen that the PBoC's aggregate policy still has a tendency to gradually increase leverage in order to stabilize the economy and employment as its priority target. However, the leveraging measures will be relatively "gentle" and more precise. Combined with increasing fiscal expenditure and increasing government investment in infrastructure projects, the possibility of deleveraging is not high.
It is worth noting that Yi Gang, governor of the PBoC, recently remarked that monetary policy will continue to exert its strength for economic recovery while wielding structural tools to provide targeted support to specific areas such as smaller enterprises and the green transformation. While the aggregate policy maintains the stability of aggregate demand, the increase in demand and the economic structural adjustment will be more dependent on structural policies.
The PBoC's quarterly meeting indicates that the implementation of structural policies is more intuitive and specific, while the use of various new structural tools also means there will be changes and opportunities in industries. Tellingly, structural policies have a more direct effect on stabilizing the employment situation dominated by small and medium-sized enterprises than aggregate policies. This also shows that the model of emphasizing on both aggregate and structural policy mix has not fundamentally changed.
In general, although the economic recovery in China has shown a positive trend after the impact of the COVID-19 pandemic has weakened, as the international situation becomes increasingly complex, coupled with the rise of global inflation, the central bank's monetary policy needs to maintain a balance between stabilizing employment and stabilizing prices. This also signifies that the implementation of monetary policy is facing more difficulties and uncertainties. In the short term, in order to consolidate and promote the further recovery of the economy, a relatively loose tone will still be maintained, but with the recovery of employment and rising inflation, monetary policy will be adjusted in a stable direction, showing the "flexibility" of precise adjustment.
Final analysis conclusion:
Judging from the information disclosed at the meeting of the PBoC's monetary policy committee, in the short term, China's monetary policy will still adhere to the model of maintaining both aggregate and structure, so as to push for economic recovery. However, as the economy recovers and with the possible changes in inflation, the possibility of a stable correction in the future will increase.
