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The People's Bank of China has to be aware of the danger that western stimulus could generate inflation as any move by the Federal Reserve towards tightening could become a constraint for the PBOC's own monetary policy if the Chinese economy slows in the second half of the year, a PBOC official and a source close to policy makers said.
Credit expansion will slow as the PBOC tightens controls on capital flowing into the rising property market, but the central bank may deploy tools such as its relending facility to deliver cheap money to the real economy whilst remaining wary of fueling excess leverage or financial risks, the source said.
But, while the economy is likely to slow in the second half of the year as the base effects from the sharp contraction at the beginning of the Covid pandemic fall away, the PBOC's response may be restrained if the Fed moves towards tightening, the source said.
Easing by western central banks has raised the risk of an upsurge in global inflation, said Xu Nuojin, head of PBOC's Zhengzhou branch and a delegate to the National People's Congress. But the PBOC is still contending with an economy recovering from the effects of Covid, so it must balance the need to maintain growth while normalising policy after last year's pandemic stimulus and guarding against excessive creation of leverage or any spike in prices, Xu said in a written reply to questions.
China's macro leverage ratio jumped 23.6 percentage points to a record level 270.1%. last year, as the authorities encouraged credit creation during the pandemic.
Growth is key to reducing the leverage ratio, but allowing policy to remain accommodative for too long would encourage excessive debt levels, Xu said. Housing and equity prices are already rising on the back of ample liquidity, perhaps contributing to medium- and longer-term financial risks, he said.
Bad loans are also increasing, after medium- and smaller-sized banks increased lending to companies during the pandemic, and these lenders urgently need to boost their capital, Xu said. The PBOC will expand channels for recapitalisation and introduce new facilities to assist banks, he said, without going into greater detail.
The central bank will also continue its drive to improve policy transmission by emphasising its open market operations for short-term policy rates, while its medium-term lending facility signals rates further along the curve, Xu said. The central bank also wants banks, particularly smaller ones, to use its Loan Prime Rate as an internal, as well as external, benchmark. In exchange rate policy, the PBOC will strengthen guidance for a stable yuan.
In his annual working report earlier in March, Premier Li Keqing said "serving the economy" should be the top priority for monetary policy, calling for lower real lending rates and for big lenders to increase loans to small business by over 30% this year. Loans increased by about CNY20 trillion in 2020, up CNY2.82 trillion from 2019's rise,
Now the pandemic is under control, monetary policy should normalise sustainably, balancing boosting recovery with risk prevention, said Guo Xinming, head of PBOC Nanjing branch and a delegate of the National People's Congress.
But the PBOC will continue to provide assistance to small businesses, PBOC officials said. The use of digital technology will be one way of improving loan availability, said Zhou Zhenhai, counsellor to the PBOC and former head of the PBOC's Tianjin branch, adding that smaller lenders should cooperate with tech companies to strengthen their coverage of small firms.