MNI INTERVIEW: Low Inflation Gives Room For More China Easing

China’s low levels of inflation provide ample room for additional fiscal and monetary stimulus, a senior policy advisor told MNI, adding that the central bank should continue to support the yuan, but currency depreciation should not limit its easing.

Low inflation is more crucial for fiscal sustainability than deficit or debt levels and would allow the government to take advantage of historically low borrowing costs, with Chinese government bonds highly sought-after, and overheating risks minimal, said Zhang Bin, deputy director at Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

The People’s Bank of China should also cut interest rates more aggressively, though lenders’ tight interest margins may restrain monetary transmission, said Zhang, also a delegate to the National Committee of the CPPCC, the country’s top advisory body. At the same time, the recent reduction in the central bank’s inflation target to “around 2%” from “around 3%” is a positive step, he said, as it provides a clearer, more realistic framework for monetary policy. (See MNI: China To Lower 2025 CPI Goal As Deflation Pressure Looms)

Subdued price growth resulting from insufficient domestic demand was addressed as a key challenge in the Government Work Report released by Premier Li Qiang last Wednesday, which raised the fiscal deficit target to an unprecedented 4% of GDP ratio and announced an increase of CNY2.9 trillion in government borrowing from last year. It also reiterated the PBOC’s “appropriately accommodative” monetary policy stance.

REVENUE KEY

While both fiscal and monetary policy will be more active than last year, with broad fiscal expenditure likely increasing by over 5% y/y from just 2.7% growth in 2024, the strength of the fiscal impulse will depend on revenues, including from taxation and land sales, as well as on the pace of budget implementation, Zhang explained.

Rates on targeted relending tools would be lowered to boost key and troubled sectors, together with the PBOC’s policy rate, and banks’ reserve requirements, he said.

While Zhang has long been a prominent advocate of a more liberal exchange-rate policy, he endorsed the PBOC’s current approach of limiting yuan weakness, which he said resulted largely from short-term market dynamics, carry trades and geopolitical risk hedging. (See MNI: PBOC Persists With Yuan Support For Now-Advisors)

A weaker yuan does not reflect economic fundamentals, he said, and nor should currency deprecation be allowed to become a constraint on monetary easing.

YUAN PRESSURE

"I do not think the yuan has significant room for further depreciation,” Zhang said, adding the currency’s real exchange rate had declined largely due to the drop of its spot price and relatively low domestic price levels, which are not in line with fundamentals as China’s trade surplus printed as much as USD768 billion in 2024.

Dollar-yuan fell to 7.24 on Tuesday morning, maintaining its decline since early February when the pair topped out at 7.36. 

The PBOC must act to stabilise expectations and send clearer signals to deter speculation, he argued.

Over 60% of China’s FX transactions are tied to trade settlements, Zhang said, noting monetary easing that boosts real economic performance and asset prices could encourage companies to convert more foreign earnings to yuan for domestic use, thereby reinforcing demand for China’s currency. 

The Government Work Report’s emphasis on supporting the property and stock markets should also be supportive of the yuan, according to Zhang.