China won’t follow West by easing monetary policy, says central bank chief

Frank Tang
·3-min read

China will not follow Western economies by undertaking a large-scale monetary loosening, but will instead look to consumer price stability and exchange rates to help the economy recover, the central bank governor has said.

“Implementing a normal monetary policy, i.e. a positive interest rate and a rising yield curve, is good to provide incentives for market entities and promote sustainable development of the economy and society,” Yi Gang wrote in an article published by China Finance magazine on Saturday.

“It will also be good to improve the competitiveness of yuan assets, and thus help us utilise both domestic and external markets.”

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The world’s second largest economy has unlocked 9 trillion yuan (US$1.3 trillion) to fight the Covid-19 pandemic, stabilise the economy and help businesses and individuals.

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But unlike the US Federal Reserve, which has started unlimited quantitative easing, the People’s Bank of China has been reluctant to inject more liquidity and actually slowed the pace of credit supply after its initial efforts to kick-start the economy.

“We need to maintain reasonable liquidity, money supply and aggregated financing, but must say no to a flood of money at the same time. Instead, we should target growth near potential productivity and avoid economic fluctuations,” Yi wrote.

China’s benchmark one-year deposit rate was kept unchanged at 1.5 per cent, while the benchmark one-year loan prime rate (LPR) has only fallen by 1.3 percentage points so far this year, guided by the central bank’s policy rate cuts.

Yi Gang warned that quantitative easing could prove hard to quit. Photo: Reuters
Yi Gang warned that quantitative easing could prove hard to quit. Photo: Reuters

Yi warned that the stimulus adopted by major developed economies will see diminishing effects and will be hard to quit.

“In the long run, it will inflate debt and asset bubbles, distort economic structures, influence income distribution and increase systematic [financial] risk,” he wrote.

The central bank is now hoping to keep consumer prices, the yuan and exchange rates stable with China widely expected to report positive growth for the year.

After recording its first drop in GDP in four decades in the first quarter of the year it reported a 3.2 per cent increase in the second quarter.

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Its solid performance has already increased market enthusiasm for the yuan, prompting capital to flow into the domestic markets and the value of the yuan to rise by about 4 per cent compared with the US dollar in the first nine months of the year.

“A successful economy must keep its currency stable. This not only includes stable domestic consumer prices, but also basic stability in exchange rates,” Yi said.

The governor said the central bank has largely abandoned forex market intervention and will insist on a market-oriented exchange rate mechanism.

“The market-orientation and flexibility of yuan exchange rates has improved significantly. Market expectations are stable, while forex market functions orderly,” he added.

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