China’s central bank promised at the weekend to implement greater policy support to offset the economic damage of the coronavirus pandemic, but continued to indicate its reluctance to enact a massive stimulus effort like that following the global financial crisis in 2008.
The statement from the People’s Bank of China (PBOC) comes amid increasingly heated debate between Beijing’s top policymakers about the appropriate scale of an economic rescue package and how to pay for it. The discord has taken on new urgency as China readies to hold the first session of the annual National People’s Congress next week.
“Economic growth and employment needs greater emphasis when seeking a dynamic balance among multiple goals,” the PBOC said in its first quarter monetary policy implementation report released on Sunday.
“We must have greater policy support to offset the impact of the pandemic and provide an appropriate monetary and financial environment for the economic recovery,” it said, foreshadowing a further loosening of its monetary policy.
The need for additional economic aid has grown as the world’s second largest economy continues to struggle to bring activity back to the level of late last year, before the outbreak began.
The economy contracted 6.8 per cent in the first quarter and may remain weak this quarter as the impact of the pandemic continues to harm business activity in the rest of the world.
While China’s manufacturing sector has resumed most production, exports are expected to ease in coming months due to a decline in demand from the United States and European Union, parts of which are still under lockdown to contain the pandemic.
In addition, the Chinese services sector remains weak as restaurants, entertainment venues and small shops are just starting to reopen amid continued consumer wariness about possible second round outbreaks of the virus.
“The duration of the global pandemic and its negative influence could be larger than expected. The results of reopening efforts [of business] in Europe and the United States need further observation,” the PBOC said.
“We must make complete estimates of the difficulties, risks and uncertainties since the challenges for economic development are unprecedented.”
The central bank removed from Sunday’s report a phrase that appeared in previous documents that it would “avoid excess liquidity flooding the economy”, reflecting the reality that huge financial resources are needed to combat the virus and boost domestic demand.
The PBOC has already cut the required reserve ratio three times and steadily lowered its market interest rate so far this year, pumping trillions yuan of liquidity into the market.
It also provided an additional 1.8 trillion yuan (US$254.4 billion) of funds to commercial banks to increase their capacity to lend to the small businesses that have been hit hardest by the pandemic.
New loans surged to 1.7 trillion yuan in April, beating market expectations of 1.3 trillion yuan, PBOC data showed on Monday. Aggregated financing reached 3.08 trillion yuan last month, compared to 1.67 trillion yuan a year earlier and 5.15 trillion yuan in March.
Growth of M2, the broad measure of money supply, rose by 0.5 percentage points from March to 11.1 per cent.
Central bank officials, particularly governor Yi Gang, have long made it clear they have no intention of resorting to Western-style quantitative easing, given the sharp rise in debt and wasteful projects that resulted from the 4 trillion yuan (US$586 billion) stimulus package in 2008-09.
In an article published late last month, Yi warned the risks that have accumulated in China’s financial system remain high, so an excessively large stimulus package would risk stoking inflation and bring a rapid increase in the nation’s already high debt level.
Sunday’s quarterly report reiterated the central bank’s view that it should preserve a normal monetary policy.
The PBOC stressed that the loosening of policy should be aimed at supporting the real economy, particularly small private-sector businesses, and “the growth of money, credit and aggregate financing must be in line with the [needs of] the economy.”
Xie Yaxuan, chief macro analyst at China Merchants Securities, said overall leverage in the economy in terms of the debt-to-gross domestic product (GDP) ratio will be a gauge of the PBOC’s economic stimulus.
Xie’s calculations indicated that the leverage ratio jumped by 14 percentage points in the first quarter, already surpassing PBOC’s target of holding the rise to about 10 percentage points this year.
“It means there’s little room for [monetary] policy to be loosened further,” he wrote in a research note. “The central bank will cooperate [with government strategy] on pandemic control and GDP growth, but it won’t allow a further increase of debt in the real economy.”
At the parliamentary congress due to start May 22 the government will unveil a series of economic targets, including the central government budget deficit ratio, the employment rate and the size of a special treasury bond issue to fund the economic support programme.
However, it remains unclear if the government will release a GDP growth target for this year given uncertainties about the economic outlook.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
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