MNI INTERVIEW: China Has Room For Further Monetary Easing

China’s monetary policy still has room for easing to address domestic and external uncertainties, with structural facilities playing an increasingly prominent role during a period of economic restructuring, a prominent economist and government advisor told MNI in an interview. 

The People’s Bank of China has potential for further cuts to interest rates and banks’ reserve requirement ratios, though there is currently no urgency to deploy all tools immediately, said Sun Lijian, director of the Financial Research Center at Fudan University in Shanghai.

Instead, policymakers must maintain flexibility in order to be able to respond to the fallout from U.S. tariffs, and as China navigates risks, drives innovation-driven growth, and upgrades its industrial structure, Sun, who advises Chinese governments, said in an interview. (See MNI PBOC WATCH: PBOC Seen Easing, Guiding LPR Lower, In Q2)

China’s economic authorities are prioritising structural monetary tools over traditional broad-based rate or RRR cuts, reflecting the complexity of a structurally-imbalanced economy, Sun said, highlighting the recent introduction of CNY500 billion in consumer and ageing-care relending facilities in a bid to spur service sector growth. 

According to Governor Pan Gongsheng, the PBOC’s nine structural monetary tools had an outstanding balance of about CNY5.9 trillion as of the end of April, accounting for 13% of its balance sheet, a proportion which Pan described in a briefing last week as within “a reasonable range.”

WEAK DEMAND

Domestic challenges ahead include the danger that risk-averse banks restrict lending to SMEs and to private enterprises despite policy nudges, and that cautious household and corporate spending trap liquidity within the financial system, weakening stimulus, Sun said.

During an economic downturn, market players tend to adopt pro-cyclical behaviors via reducing consumption and investment, thereby creating a vicious cycle that exacerbates any slowdown, he said.

However, China’s state-owned banks and financial institutions can be directed to provide rapid, large-scale resource allocation in line with regulatory directives, enabling cohesive policy execution and providing a unique advantage over other economies, albeit with room for efficiency improvements, he noted. 

Recent measures taken jointly by the PBOC, the China Securities Regulatory Commission, and the National Financial Regulatory Administration will help to stabilise markets and expectations, he said. (See MNI INTERVIEW: PBOC To Ease In Tariff Response - BOC's Zong)

But weak domestic demand, together with the risk of external shocks, and inefficiencies in policy transmission, mean monetary policymakers will need to closely monitor the real economy, and coordinate their actions with fiscal policy and targeted industrial measures, he said.