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MNI INTERVIEW: China's Policy Window Is Now-Ex-PBOC MPC Member


Total Social Financing has increased at a slow pace in the first seven months of the year.

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China needs to take policy steps to balance the economy for a tough year ahead heightened by a Politburo warning in July of "uneven" and "unstable" economic conditions, a former PBOC Monetary Policy Committee member told MNI.

Huang Yiping, now deputy dean of National School of Development at Peking University, said it "makes sense" that more monetary policy support is needed, particularly when Total Social Financing (TSF), a broad measure of credit and liquidity, is rising at a slower pace, see: MNI: China Special Bond Sales To Pickup, Along With Liquidity.

"Generally speaking, the downturn pressure of the economy will be strong in the rest of this year through next year, so the overall macro policies including both monetary and fiscal ones should adjust their pace," said the prominent economist, "a moderate increase in liquidity is reasonable … a rate cut could also be considered if necessary. "

But compared with liquidity supply, more factors need to be considered for a rate cut, including that lower lending rates may lead to arbitrage with the comparatively high mortgage rates in the property market , which Beijing has been under its radar for bubble conditions, Huang pointed out.

He said the Politburo warning at July-end took note of uncertain external and domestic conditions and used the new uneven and unstable language in a clear break from its April update which stressed a "window(of) time" for structural and quality improvements to the economy.


Huang, who left the MPC in 2018, said the People's Bank of China should set an easing bias and unleash more liquidity to boost credit expansion.

"The added liquidity supply will help boost the TSF, which has seen a slower increase so far this year," he said.

Easier policy could also take some pressure off lenders to write-off bad loans to small businesses hit heavily by the pandemic, Huang said. He warned that without ample liquidity and capital, troubled lenders may trigger financial risks.

"It is concerning that the non-performing loans may rise as the large amount of loans to small businesses is due, which needs more liquidity support from the central bank," the economist said.

But, he added, dovish measures should be taken cautiously as the possible policy divergence between China and the U.S central banks may pressure the yuan and capital flows.

The PBOC must prepare for the coming Fed tapering and rate hikes and retain the flexibility of the yuan exchange rate and a strong economic performance to cushion the possible capital outflow, Huang suggested.

However, he noted China is less vulnerable when encountering Fed's policy changes compared to other emerging markets as the country's trade surplus has expanded since last year and the yuan is facing much less depreciation pressure than that in 2015 when the country witnessed significant capital outflows.

In practice, there are many options in the PBOC's toolkit to provide targeted support and prevent big capital outflows, Huang said.


He said that the PBOC's reiteration on a "prudent" policy stance is aimed at avoiding expectations of a big easing step such as during the Asian financial crisis in 2008 and 2009 when outstanding TSF surged 20.5% and 34.8% respectively.

On the fiscal side, Huang expects second half outstanding TSF would edge up from an 10.7% increase in July as government debt issuance accelerates later this year to boost the economy. TSF in July printed at CNY1.06 trillion, below the CNY1.53 trillion expected and June's CNY3.67 trillion, according to the latest data.

"So far this year, regulators have tightened control on debt of local governments and their funding vehicles out of concern on regional financial risks, which also dragged down the growth of TSF," he said.

The near-term growth of TSF and M2 will be in line with nominal GDP just as the PBOC has outlined, he said.

The economist suggested that the new outbreak of the pandemic as the Delta variant is spreading rapidly across the country and the world should be taken into consideration in policy deliberations.

At present, new Covid-19 cases have been reported in over 15 provinces in China and lockdowns have been imposed again.