MNI INTERVIEW: PBOC Should Avoid Excessive Easing - Huang

China’s central bank should avoid overly expansionary monetary easing and make only temporary use of its targeted tools given the economy could grow at up to 6% this year as pent-up demand fuels a recovery, a former People’s Bank of China adviser told MNI.

Growth of 5%-6% in 2023 is a “reasonable estimate” given all Covid restrictions have been lifted, said Huang Yiping, a prominent economist and former member of the PBOC’s Monetary Policy Committee, warning that excessive stimulus could lead to overheating and jeopardise much needed structural reforms vital to drive China’s long-term growth.

“The likely 5%-6% GDP expansion is a satisfying performance, even though it is still lower than the current potential growth rate of the country considering the low comparison base in 2022, ” said Huang, now deputy dean of the National School of Development at Peking University.

“Additional policy stimulus, compared with the past three years, is less necessary in 2023, even though monetary policy will remain accommodative,” he said. “But if the economic recovery is weaker than expected, more monetary efforts should be made. ”

He is “cautiously optimistic” about a strong recovery as consumers and businesses return to normal after the lifting of Covid restrictions. However, he was cautious on the risk posed by renewed waves of infections and the weakened balance sheets of the government, households and companies. (See MNI PBOC WATCH: Five-Year LPR Cut An Option If Growth Falters)

“I think the recovery of consumption will be a gradual process rather than a steep jump, which will be based on an improvement in employment, income, as well as economic activity,” he said.

“The surge in household saving, resulting mainly from the redemption of wealth management products and a reduction in house buying, will hardly prop up consumption at a fast pace,” he continued.

DEBT BURDEN

Huang is wary of the potential overhang on growth following three years of government support for troubled companies, particularly small and medium-sized businesses, through increased credit support. The debt/assets ratio of private companies now exceeds that of state-owned enterprises. “The raised debt will restrain their capacity for further expansion,” he said.

“I estimate the economy will see a recovery at the macro level, while still struggling at the micro level, even though some sectors, such as tourism and catering, may rebound fast,” he noted.

PBOC TOOLS

So-called structural monetary tools that the PBOC has deployed in recent years to provide cheap funds to specific sectors - such as SMEs, green transition, infrastructure, and the property market - have played an important role in supporting growth.

Huang argues the tools are necessary in special circumstances, such as during the pandemic, when the transmission of monetary easing is impaired by wary banks not willing to lend or when fiscal policy is less forceful than expected.

The use of these tools should be “temporary” and their amounts “limited” as loans made by lenders may not perfectly align with the intended use of the tool, he said. Additionally, the big flow of policy funds into targeted sectors is not in line with market-oriented principles, while some loans may fall short of risk-control standards and drag down banks’ asset quality.

“Over the long term, the targeted policy supports for specific sectors are more efficient if they are implemented by fiscal authorities and policy banks,” he said. (See MNI: China’s Policy Banks Need Capital Boost In Growth Push)