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Currency stability key goal of 2019 monetary policy

Chen Jia
Updated: Dec 15,2018 8:07 AM     China Daily

Sustaining domestic growth, with an added focus on currency stability and a robust financial system, will be the key goals of the nation’s monetary policy for next year, a top central bank official said.

Speaking at a forum on Dec 13, Yi Gang, governor of the People’s Bank of China, the central bank, said that moderate easing of monetary policy would act as a buffer against negative effects when the economy slips into a downside cycle.

Interest rates will be the key tool for the PBOC to achieve its policy goals, which will gradually replace the current method of adjusting the total money supply, he said.

That is also a signal that the central bank may accelerate interest rate reform in the coming months, or allow the market to determine the cost of borrowing money and other assets’ prices, said analysts.

In the next stage of reforms, financial market interest rates could be diversified and floating within a broader range, they said.

The seven-day repo rate, a floating interest rate used in the central bank’s open market operations, has become an anchor for financial institutions to set asset prices and has more or less replaced the roles played by the one-year benchmark deposit and lending rates.

The central bank governor also highlighted several types of risks, such as a credit crunch, unexpected market vulnerability from external shocks, and shadow banking activities. The risks may increase financial fragility and require further monitoring, he said.

Adaptive liquidity among financial institutions will be maintained in the future, by freeing money out of the banks’ reserves or continuing the medium-term lending facility in the interbank market. That will keep lending rates at a lower level and prevent a credit crunch, according to a research note from CITIC Securities.

Chinese monetary policy is in transition, in line with the economic restructuring process, said Ren Zeping, chief economist of property developer Evergrande.

“Financial stability is a precondition to keep prices stable during the transition period,” said Ren.

The central bank governor posted his speech a few hours after top-level policymakers set next year’s policy tone and major economic development tasks at a meeting.

Ensuring the stability of the financial sector is one of the targets in 2019, and will be done in coordination with the policies supporting employment, foreign trade, investment and market expectations, according to a statement published after the meeting.

The overall leverage level, comprising of debt-to-GDP ratios in the government, households and corporate sectors, has been stabilized at around 250 percent since last year. The governor also expressed his confidence on achieving results after the 30-month deleveraging campaign.

The credit boom, from 2009 to 2015, had almost doubled China’s total debt within six years. Credit expansion slowed since the financial regulator decided to ban bank’s off-balance-sheet lending and tightened scrutiny of local government fundraising platforms.

“Shadow banking is a necessary supplement (to the standardized financial activities), but it has to be regulated,” said Yi.