MNI: China To Deepen Fiscal-Monetary Coordination, Eye Credit

China will deploy interest subsidies, guarantees and investment funds to stimulate credit and support key sectors as it strengthens fiscal-monetary policy coordination to counter weaker monetary transmission, policy advisors told MNI.

Liu Shangxi, vice president of the China Society of Macroeconomics, said closer coordination can improve policy transmission efficiency, particularly as the economy faces strong supply and weak demand. 

Interest subsidies and financing guarantees can ease constraints on corporate borrowing caused by debt pressures and weak profitability, he said, noting bank lending becomes more difficult as debt accumulates and real interest rates remain elevated.

Government deposits at the central bank have remained around CNY5 trillion for years, while slower government spending can leave base money trapped in treasury accounts, offsetting monetary easing efforts, he said.

The contraction of the two traditional sources of credit expansion – real estate and local government financing vehicles – adds to the need for deeper fiscal-monetary coordination to unblock the flow of funds, Liu continued.

The Ministry of Finance and People's Bank of China recently announced plans to optimise the existing CNY100 billion fiscal-financial coordination fund, expanding the scope of interest subsidies to include working-capital loans to small and medium-sized enterprises and credit-card instalment consumption. The ceiling for SME loan interest subsidies has also been raised. (See MNI PBOC WATCH: LPR To Hold, Structural Easing In Focus)

Yuan Haixia, director of the Research Institute at China Chengxin International Credit Rating, told MNI that compared with previous rules, which mainly subsidised fixed-asset lending, the broader programme is better positioned to meet SMEs' working-capital needs.

Given the weak recovery in consumption, lowering the cost of instalment financing could unlock consumer credit demand without materially increasing fiscal expenditure, Yuan said. If authorities cover 1% of loan interest costs, CNY1 of fiscal interest subsidies could support about CNY100 of loan principal, creating a significant leverage effect, she estimated.

The CNY100 billion programme has supported more than CNY20 trillion in new credit issuance, implying a nominal leverage multiple of about 200 times, Yuan added.

Liu said the fund would boost household consumption and support a recovery in private investment. Optimising its scope and scale should further strengthen its role in stimulating demand, he said.

NEW POLICIES

The Ministry of Finance has said it will introduce additional fiscal-financial coordination measures in the remainder of the year, with Yuan predicting incremental policies will focus on optimising existing tools, accelerating fund allocation and improving spending efficiency.

If policy effects fall short of expectations, authorities could expand the scope of interest subsidies, raise quotas or extend subsidy durations, she said. Authorities could also expand guarantee programmes for private investment and risk-sharing schemes for private corporate bonds. (See MNI INTERVIEW 2: China's Econ Restructure Needs More Support)

Yuan added that CNY800 billion of new policy-based financial instruments is likely to be deployed by the end of Q3 or early Q4, with scope for a further increase depending on economic conditions.

Fiscal-financial coordination is likely to focus on three main instruments, Yuan said, including interest subsidies to lower short-term financing costs; guarantees and risk compensation to support technology innovation and SMEs facing high risk premiums; and government investment funds, policy-based finance and REITs to provide long-term capital to sectors driving new quality productive forces.

Liu said fiscal authorities and the central bank could, when necessary, jointly establish a special-purpose vehicle to facilitate local government debt restructuring and mitigate risks from arrears, hidden debt and operating debt at local government financing vehicles. This would create broader scope for future policy coordination, he said.

However, Yuan cautioned that the objective should not be to maximise the multiplier of fiscal funds, but to direct limited fiscal resources towards areas where market mechanisms are insufficient, financial institutions are reluctant to bear risks, and projects have strong positive spillovers and long-term growth potential.

POTENTIAL RISKS

Yuan cautioned that while interest subsidies are an important short-term policy tool, they should not become permanent or universal. Excessive reliance on fiscal subsidies could weaken lenders' market-based risk pricing, encourage credit allocation to inefficient enterprises and channel low-cost funds into areas lacking investment or consumption demand, creating opportunities for arbitrage.

Excessive household subsidies could also encourage over-borrowing, increasing debt-servicing pressures while household balance sheets remain under repair, she said.

Future interest subsidy programmes should include clear exit mechanisms and focus on whether fiscal funds are leveraging new financing and generating effective demand, rather than simply expanding loan volumes, Yuan concluded.

MNI INTERVIEW: RBNZ Dual Mandate Return Risks Higher Inflation

The Reserve Bank of New Zealand would find communicating its reaction function more difficult should the Labour Party win November’s national election and reinstate the Bank’s dual mandate, potentially leading to a more patient approach to returning inflation to the 2% midpoint of its 1-3% target range, former Assistant Governor John McDermott told MNI

"They may have a reaction function that is appropriate but communicating that to financial market participants will be a real challenge," said McDermott, now executive director at Motu Economic and Public Policy Research, adding that communication can be more challenging than policy formulation.

A dual mandate that also targets employment, combined with what appears to be a relatively dovish governor, could also lead the MPC to take a more patient, Reserve Bank of Australia-style approach to returning inflation to target, he said, pointing to Governor Anna Breman’s deciding vote to hold the OCR at 2.25% in May. (See MNI RBNZ WATCH: Gov Breman Says Hike Incoming After Hold Vote)

Opposition Labour has pledged to restore the RBNZ’s dual mandate, requiring it to target maximum sustainable employment alongside price stability if elected in the Nov 7 general election. The National-led coalition government removed the employment objective in December 2023, shortly after taking office, returning the RBNZ to a single mandate focused on price stability.

Recent polling has shown a tight race between the major parties, with Labour and National virtually tied at an average of about 30% each. Labour has led National in most major polls since May, although its support fell sharply to 24% in Roy Morgan’s August poll, which put National ahead on 31%. Support for the centrist Opportunity Party has also risen, with its 9.5% in the latest Roy Morgan poll enough to potentially give it the balance of power.

McDermott questioned the wisdom of restoring the employment objective while inflation remains above the target band and unemployment is rising.

A dual mandate would give the Bank greater political cover to move more slowly on inflation, although it would ultimately still have to return inflation to target, he said. Policymakers would initially be more patient and maintain more moderate interest rates, but risk allowing inflation to become entrenched and requiring higher rates later, he added.

Policymakers could find themselves caught between elevated inflation and a weak labour market, he said.

FURTHER TIGHTENING

McDermott expects the Bank to raise the OCR to 3% before the end of the year, with the exact hike dates determined by Q3 CPI data due Oct 22.

With core inflation 60 basis points above target and headline inflation well outside the target band, the Bank has little choice but to hike, he said, though he reiterated his earlier view that further increases beyond 3% would depend on the inflation data. (See MNI INTERVIEW: RBNZ At Neutral Midpoint By December) 

McDermott said a key question was why New Zealand's interest rates should differ so significantly from Australia’s given their similar economic relationships. Australia’s economy is performing somewhat better, he noted, but argued that this alone did not explain the divergence in interest-rate settings.

MNI INTERVIEW: ISM Chief Concerned About Factory Slowdown

U.S. manufacturing expanded at a slower pace in August and could slow even further in coming months, Institute for Supply Management manufacturing chair Susan Spence told MNI Tuesday.

"I'm picturing a warning flag," she said in an interview. "The outlook is not as great as it was," and "it could erode." 

Spence said she is worried that the PMI, which fell 1 point to 54.6 in August, could drop closer to 50. The headline measure was below expectations, down from its 4-year high in July. The ISM production index eased 0.2 point to 58.3, still the second highest reading since 2021. 

"I'm not surprised we're still in expansion, but concerned," Spence said. "My concern is around the drop in new orders, backlog, and then the drop in imports." New orders fell 3.0 points to 53.7, backlog of orders dropped 3.2 to 51.8, and imports tumbled 3.2 to 52.5. 

The ISM chief said she wouldn't be as worried about the outlook if new orders and backlog had only decreased by half a point, but the larger falls are a more worrisome signal. 

"It concerns me. I don't believe the sector can take even half the uncertainty that there was last year with the pricing going on and a war," she said. There continues to be tariff policy uncertainty and elevated price pressures, but the Iran War and AI-related challenges are further complicating the outlook. 

SUPPLY STRESS 

Supply-chain stress remained a prominent topic in the ISM survey in August. Many respondents continued to flag price and supply chain pressures, citing challenges in commodities heavily consumed by AI, great uncertainty over when the Iran conflict will end, and another round of shifting U.S. tariff policy. 

Headwinds have been building, while the price index failed to ease further, Spence said. The prices paid index was steady at 71.1 after declining from 82.1 in May and 73.0 in June. (See: MNI: Warsh Puts Hikes On Table But Not Assured - Ex-Officials) 

"I worry about those things in the confluence batting" the PMI back down to 50, she said. "I'm mentally preparing for it because of the sentiment and the outlook." 

The employment index fell 1.6 points to 51.2. A reading above 50 indicated expansion, while being below indicates contraction. The ratio of ISM survey comments on employment dropped to 1.3 to 1, from 1.5 to 1 the previous month. 

RPT - MNI BOC WATCH: Trade War Strengthens Case For Holding

(Repeats story first published Aug. 28.)

Bank of Canada Governor Tiff Macklem's case for continuing this year's interest-rate rate hold is set to strengthen in Wednesday's announcement as the return to a full trade war amplifies competing growth and inflation risks over earlier concerns about the effects of higher energy prices.

The overnight benchmark will remain at 2.25% or the low end of the Bank's neutral range, according to all 23 economists surveyed by MNI. Prime Minister Mark Carney says he will will impose counter tariffs on USD20 billion of goods on Sept 8 and economists estimate the trade fight will dent growth by a few tenths of a percent while inflation will quicken by a similar magnitude. 

U.S. tariffs create a narrow but intense hit on autos, steel and aluminum makers which Bank officials say monetary policy isn't well-equipped to tackle. Renewed focus on trade tensions could mean Macklem drops earlier musings about the potential for multiple rate hikes to keep high oil prices brought on by the Iran conflict from creating sticky inflation.

There is no risk-free move given the speed of monetary policy compared with shifting geopolitical and market developments, Macklem has said. Core inflation is also near the Bank's 2% target for total inflation and the Bank in July said the headline gauge could slow to target early next year from recent levels around 3%. (See MNI: BOC Hold Extended Until Tariff Damage Clear -Ex Officials)

Donald Trump's escalating tariff threats could weaken growth in coming months, but markets have been stable as investors note his new Jan 1 deadline gives ample time for talks to restart and he continues to avoid levies on major imports like energy and potash. Carney similarly has avoided extreme moves such as export taxes ahead of U.S. midterm elections.

Canada's economy has also shown resilience against the first wave of tariffs last spring, and GDP growth rebounded to a 3.3% annualized pace in a report Friday, with a first-quarter contraction revised into a modest gain. Investors and economists continue to expect the Bank may hike rates early next year as spare capacity is used up. 

On Friday the Bank said there would be no advance "lockup" for reporters to review the decision as unionized security guards continue picketing the Bank's headquarters because of a labor dispute.

RPT-MNI: Warsh Puts Hikes On Table But Not Assured

(Repeats story first published on Aug 29)

Federal Reserve Chairman Kevin’s Warsh’s hawkish Jackson Hole remarks, which flagged high inflation as a primary focus for the Fed, intimated a possible need for tighter monetary policy but did not commit to actual rate increases, former Fed officials told MNI. 

“The speech was good. It reiterated his framework and gave an outlook for the economy.  It was hawkish as you might expect.  However, I am not convinced he will raise rates,” said Thomas Hoenig, former Kansas City Fed President, on the sidelines of the meeting.  

“Among other remarks he emphasized that there would be no forward guidance.  And while he acknowledged inflation was above target, he did not hint that he would raise rates.  If the inflation number for September comes in soft, or unchanged, he could argue to wait.  It's not over till it's over.”

MORE THAN WORDS

John Weinberg, a former research director at the Richmond Fed, said Warsh’s predilection for not providing forward guidance as a communications approach heightens the importance of policy action rather than talk as a policy tool 

“One consequence of backing off from forward guidance, of which I don’t necessarily disapprove, is that establishing credibility -- even more than otherwise – depends on what you do more than on whatever you do choose to say,” Weinberg said.  

“My reading of the speech is that he walked right up to the edge of saying the Fed’s interest rate needs to rise. But I’d forgive market participants for taking a wait and see attitude on this. At the end of the day, the pudding has yet to eaten, and therefore remains unproven,” (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It) 

Warsh’s speech fleshed out his economic views in greater detail than previously, soothing former policymakers and investors worried about an information vacuum but still leaving doubts about the policy path. 

"I see the speech as Chairman Warsh underscoring his determination to fight inflation, including by hiking rates if necessary," said former Fed board economist Nathan Sheets. "Even so, there are other important questions about the path of policy going forward, including the strength of the economic data in the months ahead and whether he successfully persuades his colleagues." 

CLEAR SIGNALS

Inflation cooled in June and July after spiking in May from soaring gas prices, yet it remains above the central bank’s target. According to the Fed’s preferred measure, it was 3.7% in July.

Fed funds futures prices imply nearly a 60% probability that the Fed will raise rates by 25 basis points at its next meeting Sept 15-16.

Warsh on Friday reiterated his skepticism about providing guidance or even outlining his broad approach to interest-rate policy.

Weinberg said Warsh’s idea of pulling back from guidance in order for markets to provide a cleaner signal to policymakers has become muddled. 

“Financial asset prices depend on two buckets of factors -- one is monetary policy actions and expectations of future actions, and the other is everything else. If policy makers want to know what market moves are telling them about the everything-else-bucket they have to filter out their best estimates of the effects of the policy bucket,” he said.  “It’s a hard problem, and one that isn’t obviously easier without forward guidance”

MNI: Warsh Puts Hikes On Table But Not Assured - Ex-Officials

Federal Reserve Chairman Kevin’s Warsh’s hawkish Jackson Hole remarks, which flagged high inflation as a primary focus for the Fed, intimated a possible need for tighter monetary policy but did not commit to actual rate increases, former Fed officials told MNI. 

“The speech was good. It reiterated his framework and gave an outlook for the economy.  It was hawkish as you might expect.  However, I am not convinced he will raise rates,” said Thomas Hoenig, former Kansas City Fed President, on the sidelines of the meeting.  

“Among other remarks he emphasized that there would be no forward guidance.  And while he acknowledged inflation was above target, he did not hint that he would raise rates.  If the inflation number for September comes in soft, or unchanged, he could argue to wait.  It's not over till it's over.”

MORE THAN WORDS

John Weinberg, a former research director at the Richmond Fed, said Warsh’s predilection for not providing forward guidance as a communications approach heightens the importance of policy action rather than talk as a policy tool 

“One consequence of backing off from forward guidance, of which I don’t necessarily disapprove, is that establishing credibility -- even more than otherwise – depends on what you do more than on whatever you do choose to say,” Weinberg said.  

“My reading of the speech is that he walked right up to the edge of saying the Fed’s interest rate needs to rise. But I’d forgive market participants for taking a wait and see attitude on this. At the end of the day, the pudding has yet to eaten, and therefore remains unproven,” (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It) 

Warsh’s speech fleshed out his economic views in greater detail than previously, soothing former policymakers and investors worried about an information vacuum but still leaving doubts about the policy path. 

"I see the speech as Chairman Warsh underscoring his determination to fight inflation, including by hiking rates if necessary," said former Fed board economist Nathan Sheets. "Even so, there are other important questions about the path of policy going forward, including the strength of the economic data in the months ahead and whether he successfully persuades his colleagues." 

CLEAR SIGNALS

Inflation cooled in June and July after spiking in May from soaring gas prices, yet it remains above the central bank’s target. According to the Fed’s preferred measure, it was 3.7% in July.

Fed funds futures prices imply nearly a 60% probability that the Fed will raise rates by 25 basis points at its next meeting Sept 15-16.

Warsh on Friday reiterated his skepticism about providing guidance or even outlining his broad approach to interest-rate policy.

Weinberg said Warsh’s idea of pulling back from guidance in order for markets to provide a cleaner signal to policymakers has become muddled. 

“Financial asset prices depend on two buckets of factors -- one is monetary policy actions and expectations of future actions, and the other is everything else. If policy makers want to know what market moves are telling them about the everything-else-bucket they have to filter out their best estimates of the effects of the policy bucket,” he said.  “It’s a hard problem, and one that isn’t obviously easier without forward guidance”

MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It- Evans

Federal Reserve Chairman Kevin Warsh’s hawkish rhetoric on inflation might need to be backed up with concrete action in the form of interest rate increases soon in order to preserve the FOMC’s price stability credentials, former Chicago Fed President Charles Evans told MNI Friday.

“The balance of risks for Warsh almost has to be that he should take action to show that he's very serious about bringing inflation down,” Evans said in an interview. 

There is a good case to be made for a “watchful waiting” strategy, namely that much of the above-target inflation is being driven by supply related factors that could soon fade even without restrictive monetary policy, Evans said. 

But he added that Warsh’s sharp critique of the Fed for allowing excess inflation to persist for over five years means “you could have imagined him acting with more pace since he promised regime change.” 

Evans welcomed the chair’s inaugural Jackson Hole remarks as offering greater detail into his view on the economy and inflation than he had previously. 

“He hadn’t talked enough in my opinion about why he was not providing more of an economic outlook,” he said. (See MNI: Warsh Speech Non-Committal On Action - Ex-Officials)

ACT NOW

The other problem with waiting too long before tightening policy is allowing higher inflation and inflation expectations to become entrenched in a way that requires even more aggressive action later. 

“The risk that he would be running is that you lose track of this. Inflation takes hold, and now it's even harder to bring down,” Evans said. “You take some action now so you don’t find yourself behind the eight ball later and having to do more.”

PCE inflation, which Warsh reinforced is the Fed’s target measure, rose 3.7% in July, while core prices climbed 3.3%. 

RATE PATH UNCLEAR 

Still, Warsh’s hawkish comments on inflation were sufficiently conditional that rate hikes are not yet a sure thing, added Evans. He said the chairman seems to be hoping for now that a forceful verbal commitment to returning to 2% might be enough. 

“People are still struggling on how he’s going to come down on this,” said Evans. “I can't say I know how it will play out. That's what he wants. He wants everybody to sort of figure it out yourselves, see about the data. I’m not quite sure I find that particularly helpful.”