PBoC falls into line

After Friday’s Politburo meeting it seems that the perception that there has been a shift in policy-making is nearly unanimous. The meeting’s focus on “stability” and “continuity” included as a major objective the maintenance of “sustained, stable, and relatively fast growth.” And although “preventing prices from rising too fast” continues to be described as an important policy goal, gone are the references to preventing overheating and maintaining the tightening bias in monetary policy.

In that context it is not as surprising it otherwise might have seemed, I guess, that the PBoC is now calling for growth while ignoring references to tight monetary policy. According to a report extlink_3.giffrom today’s Xinhua:

China’s central bank said Sunday it would seek to create conditions for “relatively fast” economic growth in the coming months, despite the ongoing threat of inflation. “We will use various monetary policy tools to create good conditions for stable, relatively fast growth,” the bank said on its website.

The central bank’s statement came after recent figures suggested growth in China’s economy — the world’s fourth-largest — is beginning to slow.

This has caused quite a lot of heated discussion in the financial markets. One of my students who works in a large city bank in one of the rich southern provinces told me by email this morning that “everyone in my bank is discussing the new statement by the PBoC – and their reluctance to use the phrase tightening policy for the first time. This is close to Wen Jiaobao’s voice. “

According to him, however, the PBoC is unwilling to lose their hawkish reputation too quickly, so the consensus in his bank is that they will continue to talk tough, and maybe even make a very ugly face soon, but will in fact actually take actions to loosen credit and liquidity conditions.

It’s not that the monetary alarmists have given up the fight. Today’s People’s Daily has an article extlink_3.gifciting a speech, also made on Sunday, by the chief economist of the National Bureau of Statistics, generally considered to be on the side of the monetary hawks. The article starts out:

The Chinese economy was likely to maintain stable and fast growth this year, despite being beset with problems and uncertainties, as fundamentals of the economy remained unchanged, Yao Jingyuan, National Bureau of Statistics chief economist, said on Sunday.

The article then goes on to say “He believed the most outstanding challenges China faced were an unbalanced economic structure and big inflationary pressure.” It seems to me that one of the arguments made by those wanting to maintain a tight monetary policy is to insist that the economy is not slowing as precipitously as the growth camp fear.

Meanwhile the stock market seems to have decided that monetary tightening is out, and easy credit, at least easier credit, is back in. The SSE Composite was up 1.33% today, closing at 2903, led largely by banks and real estate developers. Most analysts are saying that the new policy-making consensus reduces the chances, at least in the very near term, for more interest rate or minimum reserve requirement hikes, and that this is good for bank profitability and very good for the property developers. The latter have recently found it very difficult to get financing except from the informal banking sector.

Originally published at China Financial Markets and reproduced here with the author’s permission.

6 Responses to "PBoC falls into line"

  1. DJC   July 29, 2008 at 2:54 pm

    The Chinese yuan revaluation needs to immediately cease to protect the economic interests of China’s low-skilled labor population and ensure political stability for the nation. – DCChina to Slow Yuan Gains for Economic Growth says Chinese President Hu Jintaohttp://www.bloomberg.com/apps/news?pid=20601089&sid=aYPnXlpAaxeE&refer=chinaJuly 29 (Bloomberg) — China will slow the pace of the yuan’s gains as the government seeks to bolster economic growth, said Li Daokui, a researcher at Tsinghua University who attended a meeting hosted by President Hu Jintao last week. “Fast yuan gains attracted inflows of speculative funds, which not only fuel inflation but also may exit on a large scale some day, threatening economic stability,” said Beijing-based Li, head of the China and World Economic Research Center at the university. “That goes against the central government’s goal of stable growth set in the recent Politburo meeting.” The Politburo’s concern that a global slowdown will undermine China’s boom prompted the biggest policy change in five years.

  2. Mandarin   July 29, 2008 at 4:15 pm

    PB of China falls in line – you bet – when the leadership decides to favor growth over price stability. As for the bank’s desire to maintain it’s hawkish reputation – here’s another take. As bankers, sure, they instinctively favor stable prices. But before they’re bankers they’re state functionaries with no political independence, managing a non-convertible currency in line with Finance Ministry directives. The State may value the expertise of the Bank’s economists; overseas investors may look to it for reassurance. But as an influence on policy PB of C is not in the same universe with the Fed or any major western central bank.

  3. Michael Pettis   July 30, 2008 at 5:24 am

    Mandarin, the PBoC certainly seems to have lost a lot of credibility and power in the last couple of years, if they had much to begin with, and although they are generally very worried about monetary loosening, they seem reluctant to take on the pro-growth camp. Still, the disagreements between the two camps have become fierce and open enough for the leadership to knock heads together. There is a real sense of policy disarray here, and the radical shifting of policy back and forth over the last twelve months doesn’t suggest any firm conviction.

  4. Gloomy   July 30, 2008 at 1:36 pm

    As the global economy slows, won’t China and other countries decrease their purchase of US government debt? And doesn’t this decrease in demand occur just as supply is increased due to record US deficits (projected as twice last year’s deficit)? Aren’t we headed for much higher US rates and a much lower dollar? How destabalizing are these events?

  5. TR   July 31, 2008 at 3:27 am

    If a slowdown coincides with a decling US trade deficit, that definitely means fewer net US Treasury purchases (or, at least, fewer USD asset purchases) by foreigners. The impacts on interest rates and the dollar, however, depend on too many things to make them easily predictable. What is more predictable, and more worrying, is that declining demand will make it harder for surging Chinese industrial production to find buyers, and we may see a rapid inventory build-up in China.

  6. bose headphones   July 3, 2009 at 1:00 am

    I like very much the writings and pictures and explanations in your adress so I look forward to see your next writings.