China sig­nals stronger pro-growth pol­icy stance

The Pak Banker - - 6BUSINESS -

More signs point­ing to stronger pro-growth mon­e­tary and fis­cal poli­cies have emerged af­ter two days of meet­ings in Shang­hai be­tween fi­nan­cial min­is­ters and cen­tral bankers of G20 economies, which con­cluded Satur­day. The growth-sup­port­ive pol­icy stance was re­in­forced as the cen­tral bank an­nounced on Mon­day it would lower the re­serve re­quire­ment ra­tio (RRR) for com­mer­cial banks by 0.5 per­cent­age points, the first such cut this year.

While cen­tral bank gov­er­nor Zhou Xiaochuan shifted the tone on mon­e­tary pol­icy from "pru­dent" to one of "eas­ing bias," Fi­nance Min­is­ter Lou Ji­wei saw more room to fur­ther ex­pand fis­cal pol­icy and pre­dicted in­creased bud­get deficit this year.

The fresh signs come ahead of China's an­nual par­lia­men­tary ses­sion, which be­gins Satur­day and will pin down eco­nomic tar­gets and sketch out key eco­nomic poli­cies for the world's se­cond largest econ­omy. The shift of tone on mon­e­tary pol­icy, which has been char­ac­ter­ized as "pru­dent" since 2011, brings pol­icy lan­guage in line with re­al­ity, Bloomberg econ­o­mist Tom Or­lik wrote in a re­search note.

To ar­rest the eco­nomic down­turn re­sult­ing from a painful tran­si­tion to a more sus­tain­able growth model, China has cut in­ter­est rates and the re­serve re­quire­ment ra­tio of banks sev­eral times since 2014.

Qu Hong­bing, HSBC chief China econ­o­mist, said that the new de­scrip­tion of mon­e­tary pol­icy chimes with the on­go­ing eas­ing of mon­e­tary con­di­tions since last year.

The Peo­ple's Bank of China (PBOC) in­jected more than 1.5 tril­lion yuan ($29 bil­lion) into the mar­ket in Jan­uary via open mar­ket op­er­a­tions, in­clud­ing medium-term lend­ing fa­cil­ity and the stand­ing lend­ing fa­cil­ity, while also pledg­ing sup­ple­men­tary lend­ing op­er­a­tions.

For pos­si­ble down­side risks, China still has the space and tools for mon­e­tary eas­ing, the cen­tral bank gov­er­nor said on the side­lines of the meet­ings in Shang­hai.

"Our in­ter­pre­ta­tion is that there is still room and space for use of low-pro­file tools like the medium-term lend­ing fa­cil­ity to guide loan costs down, and the need to avoid sell­ing pres­sure on the yuan will make it more dif­fi­cult to cut bench­mark rates in the short term," Or­lik noted. The change in tone echoes pol­icy guide­lines at China's eco­nomic work con­fer­ence in

set De­cem­ber, which re­quired the pro-ac­tive fis­cal pol­icy to be "more force­ful" and the pru­dent mon­e­tary to be "more flex­i­ble."

"The PBOC has a broad enough tool­kit to ease mon­e­tary con­di­tions in a va­ri­ety of ways," said Qu of HSBC in a re­search note.

How­ever, the eas­ing to be ap­plied in 2016 will not be a "one size fits all," as the cen­tral bank will "seek to strike a bal­ance be­tween mon­e­tary ac­com­mo­da­tion and the need to fa­cil­i­tate struc­tural re­form," Qu added. While mon­e­tary eas­ing seems to be gain­ing trac­tion, of­fi­cials have also sig­nalled higher pri­or­ity on fur­ther fis­cal ex­pan­sion to counter the down­turn.

China still has room to ex­pand fis­cal pol­icy to push struc­tural re­forms, the fi­nance min­is­ter said on the side­lines of the meet­ings, pre­dict­ing an in­crease in bud­get deficit this year.

A proac­tive fis­cal pol­icy has been the of­fi­cial line since the global fi­nan­cial cri­sis, but re­cent poli­cies showed more tol­er­ance of deficit.

Fis­cal spend­ing growth in the fourth quar­ter of 2015 ac­cel­er­ated to 14.7 per­cent year on year, with fis­cal deficit ex­pand­ing 23.3 per­cent year on year, ac­cord­ing to China Int. Cap­i­tal Corp. (CICC). China raised its bud­get deficit to 2.3 per­cent of GDP in 2015, up from 2.1 per­cent in 2014. A 3-per­cent deficit ra­tio is nor­mally con­sid­ered the line not to be crossed.

But di­rec­tor of the cen­tral bank's sur­veys and sta­tis­tics depart­ment Sheng Songcheng last week sug­gested that China could raise the ra­tio to 4 per­cent of GDP or even higher.

"The 3-per­cent warn­ing does not fit with China's re­al­ity," Sheng said, cit­ing China's rel­a­tively small out­stand­ing debt, ra­tio­nal struc­ture, con­tin­ued growth in fis­cal rev­enue and solid as­sets of state firms.

UBS econ­o­mist Wang Tao also be­lieves more fis­cal pol­icy op­tions are still avail­able in China, say­ing that govern­ment debt lev­els re­main mod­er­ate and man­age­able; there is still room to build more in­fra­struc­ture and im­prove the safety net; and do­mes­tic sav­ings are high enough to fi­nance govern­ment bor­row­ing. Qu at HSBC ex­pects larger fis­cal spend­ing will be used to cush­ion the im­pact of re­struc­tur­ing in sec­tors strug­gling with over­ca­pac­ity, pro­mot­ing in­dus­trial up­grad­ing and in­fra­struc­ture in­vest­ment.

"Judg­ing by the tone of the re­cent dis­cus­sions, a deficit tar­get of any­where be­tween 4 per­cent to 5 per­cent of GDP is cer­tainly pos­si­ble," Qu wrote in a re­search note on pre­view­ing China's 2016 eco­nomic poli­cies on Sun­day.

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