Chinese stock market’s fast and furious April was rooted in fear of a monetary policy turn
- While China’s central bank has denied that a big monetary policy change is in the offing, recent signals suggest an era of accommodative policy is at an end
However, we can hardly infer this from recent statements from the Chinese central bank.
On April 25, Liu Guoqiang, deputy governor of the People’s Bank of China (PBOC), said in a media briefing that the central bank had no intention of either tightening or relaxing monetary policy.
Somewhat surprisingly, Sun Guofeng, head of the PBOC’s monetary policy division, said: “We didn’t loosen monetary policy in the past and haven’t tightened it at this juncture.”
In fact, there were a couple of indicators suggesting that the policy had eased significantly, if not aggressively, since mid-2018.
This clearly indicates that commercial banks have rapidly expanded their asset books to revive the economy.
Secondly, property prices bottomed out in the middle of 2018 and accelerated thereafter, reflecting an improvement in domestic demand.
All told, thanks to the central planning system, China seemed to be succeeding once again in stabilising its economy via proactive fiscal policy and accommodative monetary policy.
The market had also turned increasingly bullish on China’s growth outlook.
However, there has been a change recently.
In late March, there was speculative news that the PBOC would reduce the reserve requirement ratio – the minimum amount of capital banks are required to hold with the central bank to guard against potential losses – from April 1.
In the past, the Chinese central bank would not have responded to this sort of market report.
This rare move by the central bank might have been the first sign that China’s policy stance was on the brink of change.
Since then, there have been more signals that the overall policy will be less dovish.
Indeed, Chinese leaders have made it clear that while monetary policy easing, a pro-cyclical measure, is able to spur short-term growth, to deliver long-term prosperity China needs radical structural and institutional reforms.
The result was the volatility that the Chinese stock market experienced over the past month. Recent events suggest China’s growth trajectory won’t be smooth sailing.
Hao Zhou is senior emerging markets economist at Commerzbank