Why China is unlikely to turn to aggressive monetary policy tightening
- The magnitude of monetary easing looks modest compared with previous cycles, with inflation an unlikely risk and growth taking the weight off debt leverage
- Moving aggressively would destabilise jobs and SMEs – though that is still a possibility if economic recovery comes faster than expected
The Chinese economy hit a soft patch early this year as the momentum of both consumption and investment growth weakened.
With the domestic coronavirus situation firmly under control again, China’s economic growth momentum is likely to show a notable recovery in the second quarter. In particular, consumption recovery is likely to be helped by the recent loosening of social-distancing measures for entertainment and domestic travel.
One major risk that could derail China’s economic recovery is Beijing overtightening its monetary policy, although that seems quite unlikely for now.
China’s monetary policy has become less accommodating since mid-2020 as its economy recovered from the pandemic shock. So far, the exit from loose monetary policy has been more gradual than in previous tightening cycles.
Broad credit growth, as measured by outstanding total social financing, edged up by only 13.3 per cent year on year in February, lower than last October’s peak of 13.7 per cent, but still high compared to 2019.
Total social financing includes off-balance-sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.
There are several reasons the withdrawal of policy support is likely to remain gradual for the rest of this year.
In addition, inflationary pressure is unlikely to be a concern for the People’s Bank of China. Over the course of the year, consumer prices should rise somewhat as demand recovers and energy prices increase.
Higher GDP growth is likely to keep China’s debt-to-GDP ratio down. Given that nominal GDP could exceed 10 per cent growth this year, after just 3 per cent last year, only a moderate decline in credit growth to around 10-11 per cent, from the current 13 per cent, is needed to achieve this goal.
What is more, the magnitude of monetary easing this time around (from mid-2018 to mid-2020) looks modest compared with the 2008-2009 and 2015-2016 easing cycles. This also lessens the need to tighten monetary policy aggressively this year.
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As a result, city-specific property policies, rather than broad-based monetary tightening, are likely to be introduced to address the more specific overheating situations.
That said, one thing we need to closely monitor is the pace of growth recovery. If China’s economic growth turns out to be much stronger than expected, especially with a fast recovery in the service sectors, it could lead to complacency among policymakers and trigger more aggressive policy tightening.
Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management