Chinese monetary policy will be targeted to better serve real economic growth and buffer economic downside risks next year, in order to avoid aggressive credit expansion, according to policy advisors.
The bank lending, money supply, and in a broader context, total social financing, will maintain a proper growth pace to cope with GDP growth, they suggested.
“Monetary policy will remain stable, without too much easing of credit,” said Sheng Songcheng, a central bank advisor and a former director of the statistics department of the People’s Bank of China.
“There is room to cut the reserve requirement ratio, given the current relatively higher level compared with other countries,” according to Sheng, who said targeted monetary policy tools will be preferred to channel funds into the real economy.
In the meantime, China should control credit growth, or the redundant capital will flow into the real estate sector or the financial system, said Sheng. “As a result, tight financial regulation and control of the real estate sector is necessary.”
A State Council executive meeting held on Dec 24 called for the strengthening support for small and medium-sized enterprises, as well as private businesses. Measures will include targeted RRR cuts, said a statement.
After four RRR cuts so far this year, the ratio for large banks dropped to 14.5 percent in October, the lowest level since 2008. In addition, the PBOC launched an innovative monetary policy tool called the “targeted medium-term lending facility (TMLF)” to provide stable funds to commercial banks.
Market analysts saw stable liquidity in the overall financial system recently. But tighter liquidity conditions are possible prior to the Spring Festival, they said, which requires proper liquidity operations from the central bank to prevent volatility and maintain lower market interest rates.
Richard Xu, head of China Banking and Fintech Research at Morgan Stanley, said that a further RRR cut is necessary to ensure adequate credit supply. Other factors, including banks’ capital base and the volume of high quality credit demand, are also important in influencing the credit growth pace in China.
Tax cuts could be a better way to improve corporations’ profitability and boost investments at this time, which is “key to avoiding irrational credit expansion and reducing the risk of further credit tightening in the future,” said Xu.
The annual Central Economic Work Conference, which concluded on Dec 21, set the monetary policy tone as prudent in 2019. It also highlighted maintaining market liquidity at a reasonably ample level.
The monetary policy transmission mechanisms will be further smoothed out while the proportion of direct financing will be increased to make financing more accessible and affordable for the private sector and small businesses, according to a statement issued after the meeting.
According to a survey released by the PBOC on Dec 24, in the fourth quarter, 81.2 percent of the participants from the banking sector said the current monetary policy is “appropriate,” 4.1 percentage points higher than in the third quarter.
In the same survey, an index which indicated bank loan demand in small and micro enterprises increased to 67.9 in the fourth quarter, up from 67.1 in the third quarter and it is also higher than the indices for medium-sized and large companies, reflecting small-scale businesses’ stronger desire to obtain credit.
China’s new yuan-denominated loans stood at 1.25 trillion yuan ($181.5 billion) in November, up from 697 billion yuan in October, and it was 126.7 billion yuan more than that recorded in the same period last year, showed the PBOC data.
