MNI INTERVIEW: Call For PBOC To Boost Support For Stock Market
MNI (BEIJING) - The People’s Bank of China should enhance facilities supporting the nation’s stock markets and target stable asset prices, as traditional monetary policy loses effectiveness with inflation at very low levels, a prominent economist who advises the central bank told MNI in an interview.
There is significant space for the PBOC to expand a swap programme and a re-lending tool it announced in September, said Sun Lijian, director of the Financial Research Center at Fudan University in Shanghai, who thinks that China faces similar challenges to Japan ahead of its 1990s deflation, and that the central bank should consider setting “asset prices stability” as an intermediate policy objective. (See: MNI INTERVIEW: PBOC To Cut Rates Further, Target 2% CPI)
The facilities provide liquidity for investment funds and insurance companies buying stocks, and make it easier for banks to finance companies which are planning buybacks. Investors interpreted the announcement of the measures by Governor Pan Gongsheng as a move to tacitly include stock market stability as a policy mandate, but Sun thinks this would be better made explicit.
The PBOC’s swap programme has so far been operated twice, providing a total of CNY105 billion as of the end of January 2025, while listed companies disclosed plans to apply for re-lending tools of nearly CNY60 billion by the end of 2024, according to the PBOC's Monetary Policy Report on Thursday. (See:MNI INTERVIEW: PBOC Moves, Stimulus To Boost Stocks-BOC's Zong)
Sun, who advises both the PBOC and the Shanghai municipal government, said there is significant space for the Bank to expand these tools. China could also learn from the Federal Reserve's response during the 2008 financial crisis, and to the 2020 pandemic shock when it bought corporate ETFs in a bid to stabilise asset prices and restore credit growth.
Sun is concerned that deflationary forces caused by deglobalisation could become a major challenge to worldwide monetary authorities. Economies that have been reliant on foreign investment and exports, such as China’s, may face overcapacity and downward price pressure as global supply chains adjust, while developed countries could fall into debt deflation, he fears.
China’s core challenges are a decline in business investment and weak consumer spending. Monetary policy should focus on promoting the circulation of funds, rather than simply relying on credit expansion, Sun said.
INTERCONNECTED RISKS
“We should recognise that China is facing increasingly prominent structural deflationary pressures, and that is why we need to reflect on the lessons from Japan's experience of falling into a long-term deflationary trap,” the economist warned. (See: MNI: PBOC To Aim To Drive Inflation Higher- Advisors)
China needs to manage three interconnected systemic risks in order to avoid stagflation, Sun said. It must avoid a hard landing in the real estate market, and manage both debt defaults by local government funding vehicles and liquidity risk arising from the long-term maturity mismatches in small and medium-sized financial institutions.
“China's current challenge is not a lack of funds, but rather a lack of effective funds circulation,” he said, noting that lowering interest rates and increasing money supply are relatively ineffective in stimulating demand at a time when market confidence remains weak, and both businesses and households are more inclined to save and repay debt.
If funds cannot flow into the real economy, traditional monetary expansion may even exacerbate asset bubbles, he noted. Fiscal and monetary policies must be closely coordinated, including moves to improve the efficiency of government investment and to optimise income distribution in order to boost market confidence, he continued.