China to maintain ‘prudent’ monetary policy given positive impact of US trade deal, central bank says

Frank Tang

China’s central bank said on Thursday that the positive impact of the just-signed phase one trade deal with the United States will allow it to continue its “prudent” monetary policy this year, with only “limited” room for further cuts in banks’ reserve requirements.

“We were glad to see that the phase one trade deal was signed. It’s a good move and market expectations have seen a dramatic improvement. It is certainly a good thing,” said Zhou Xuedong, spokesman and director of the general office for the People’s Bank of China (PBOC).

The PBOC maintained a prudent monetary policy in 2019, under which is eased monetary policy modestly but did not engage in a massive addition of liquidity to support growth, as it tried to avoid a repeat of the adverse side of effects that occurred following its aggressive programme following the global financial crisis of 2008-2009.

China’s central bank will maintain the level of total financing in the economy in line with economic development, Sun Guofeng, head of its monetary policy department, said.

Still, financial analysts expect some further modest easing of financing conditions this year after the PBOC cut the bank’s required ratio – the amount of money they are required to hold at the central bank as reserves for their loan portfolio – by 50 basis points on New Year’s Day, which pumped 800 billion yuan (US$116 billion) into the banking system.

“There might be room [to cut] according to the needs of the macroeconomy, but it would be limited,” Sun added.

The PBOC’s average required reserve ratio is now 9.9 per cent, with the ratio for smaller, local banking institutions lower at around 6 per cent.

China’s central bank said that it will continue to focus on improving the structure of financing and reducing financial risks in the economy having accomplished a shift in financing away for traditional bank loans to bond and equity market financing last year, new data showed.

There might be room [to cut] according to the needs of the macroeconomy, but it would be limited

Sun Guofeng

On Thursday, confirmed that the level of total new bank lending last year, at 16.8 trillion yuan (US$2.4 trillion), an all time high, but only slightly higher than the year before, at 16.2 trillion yuan.

But total financing – including bond sales, equity financing, trust loans, short-term bank acceptance bills and other non-loan financing methods – rose to 25.6 trillion yuan (US$3.7 trillion) in 2019 from 19.26 trillion yuan in 2019 yuan. The figures were, though, pushed higher as central government treasury bonds and local government bond issues were included in the data for the first time last month.

Growth of M2, the broadest measure of money supply, stood at 8.7 per cent in 2019 from a year earlier, an acceleration from 8.1 per cent in 2018 due to an increase in “countercyclical adjustments” to support the economy, said Ruan Jianhong, the head of PBOC’s statistics department.

“Overall, the financial data was better [last year], with medium and long-term lending to corporations recovering and credit for small and micro firms continuing to rise”, she said.

“Overall, the financial data was better [last year], with medium and long-term lending to corporations recovering and credit for small and micro firms continuing to rise

Ruan Jianhong

Medium and long-term credit growth for manufacturers rose 14.9 from a year earlier, accelerating 4.4 percentage points and reaching the highest rate since 2012.

The central bank cut the required reserve ratio three times last year to maintain ample market liquidity, lowered the interest rate on the facility it uses to supply banks with liquidity at a lower cost, in line with the interest rate cuts by the US Federal Reserve.

It also lowered market rates using its newly revamped loan prime rate (LPR) mechanism. In the future, policymakers will increasingly use the LPR, introduced in August, to set market interest rates, as it is now the benchmark for more than 90 per cent of new loans.

Since its introduction, the average lending rate for all maturities has been lowered to 5.74 per cent, with the one-year LPR cut by 16 basis points last year.

“In particular, the reduction in lending costs for small firms was obvious. The average lending rate of the five biggest banks was 4.73 per cent, a decline of 0.7 percentage point. Considering other fee cuts, the burden for small firms was slashed by more than a full percentage point last year,” Sun said, the head of the PBOC’s monetary policy department.

China will release targets for economic growth, inflation control and M2 growth this year in the government work report in March.

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