China Daily Global Edition (USA)
Local factors to gauge key policy
China’s monetary policy will be determined primarily by the domestic economic situation, which requires relatively a lower interest rate level to reduce companies’ financing costs, said analysts.
They made the comments as the People’s Bank of China, the central bank, took no action after a benchmark interest rate rise by the US Federal Reserve, in line with market expectations.
A statement issued by the PBOC on its website said that it had skipped open market operations on Thursday as liquidity levels in the banking system were “relatively high”. And the liquidity could absorb factors including maturing reverse repos and government bond issuance.
China’s central bank followed the Fed’s rate hikes to lift the open market operation interest rate twice, in March and December last year, respectively. The moves were targeted to keep a relatively stable interest rate spread between the two countries and maintain a stable Chinese currency. It stood pat in June after the Fed’s second hike this year.
“The US interest rate increase has little pressure on the renminbi exchange rate,” said Sheng Songcheng, an advisor to the PBOC. “Following the Fed’s rate hike is unsuited to China’s domestic economic situation.”
He suggested reducing financing costs for the real economy, as a measure to support stable economic growth.
A State Council executive meeting, presided over by Premier Li Keqiang on Wednesday, mandated further fiscal and financial policy support to innovation and entrepreneurship, including targeted cuts of the reserve requirement ratio, more relending by the central bank, looser listing requirements on small and medium-sized enterprises in technology, and lowering the tax burden.
The market expected a further reduction of the RRR, or the cash amount that should be deposited in financial institutions, by the end of this month or in early October, as maintaining sufficient liquidity is one of the priorities for monetary policy.
“It appears another RRR cut is very likely in the near future, although the net impact on the interbank rates would be less clear, because of the need to stabilize renminbi exchange rate,” said a research note from the Goldman Sachs.
“Considering China’s domestic situation, which is at a different stage of the economic cycle compared with the US, China now should not tighten (the monetary policy), but may moderately ease under some circumstances,” said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, who served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.
China’s monetary policy should remain independent, along with a flexible renminbi exchange rate.
To ease the renminbi’s depreciation pressure, analysts suggested taking macro-prudential measures to guide the market expectation and monitor the crossborder capital flows.
The PBOC signed a memorandum of cooperation on Sept 20 with the Hong Kong Monetary Authority for the issuance of bills. This move will offer more renminbi liquidity management tools for financial institutions, and provide a better foundation for financial institutions to develop renminbi products.
China is capable of addressing potential risks in the manufacturing sector, as the nation’s massive industrial scale and increased innovation capacity give it both the resilience and leeway to maintain sound momentum, said Miao Wei, minister of industry and information technology.
He said despite the ongoing China-US trade tension, “we are confident and capable of dealing with a wide range of risks and challenges, given our strong manufacturing presence and capacity”.
In the first eight months of this year, profits of China’s major industrial companies grew 16.2 percent year-onyear. Meanwhile, the nation’s manufacturing output, which accounted for around 85 percent of industrial value, grew 6.8 percent, faster than expected, according to the National Bureau of Statistics.
“More importantly, the annual growth rate of the high-tech manufacturing sector reached 11.9 percent, and investment in the real economy is rising steadily, giving a strong boost to industrial upgrading,” Miao said in an interview with People’s Daily.
His comments came after the United States imposed additional tariffs on $200 billion of Chinese goods earlier this month. That came on top of $50 billion worth of goods already hit by 25 percent duties. Washington is also reportedly planning to raise tariffs on another $267 billion worth of Chinese goods.
“China never aims to replace the US in the 10 industrially strategic technologies in 10 years. This is a misunderstanding and overestimation of our strength,” Miao said.
He recalled that in 2015, he had made it clear that China still lagged the US by about 30 years in technology, manufacturing development and other areas. “That is to say, it will take around three decades for China to catch up with the US, let alone beat it,” Miao pointed out.
The two countries are contestants in a competition, but no one should blame the other for running faster. Strengthening cooperation and mutual benefit is a successful experience. It is impossible for any country to succeed by closing its doors and only seek its own development, according to him.
Despite the gap, Miao said China will stick to its original plan and strategies to advance its manufacturing sector by attaching great importance to innovation and the faster deployment of digital technologies in factories and business management.
From January to August, high-value-added industries such as electronics, aircraft equipment and machinery all maintained double-digit growth, indicating a steady improvement in manufacturing value.
Qu Xianming, a member of the National Manufacturing Strategy Advisory Committee think tank, said China has developed a complete industrial structure, and companies are gradually shifting toward innovation-driven growth.
“The convergence of IT and manufacturing is giving rise to a host of new business applications. Chinese companies are highly responsive to new technologies. That’s exactly what China excels at,” Qu said.