Fudan W. Economist calls on China to “tighten” monetary policy in the second half of the year

One of China’s top economists called on the central bank to pursue more active monetary policy in the second half of the year to deal with headwinds and market uncertainty, given that China’s economy has so far been spared the runaway inflation that has affected many other major economies. .

Dong Simiao (董希淼), head of Fudan University’s Institute of Financial Research, said that in the near term, monetary policy should “intensify implementation in various areas” as well as “firmer focus on our own priorities.”

Dong made remarks in an opinion material published by immediately after the release of the People’s Bank of China’s (PBOC) second quarter monetary policy report, as well as a reduction in the scale and pace of lending in July.

Credit contraction in July prompted the PBOC to cut rates for the 7-day reverse repo and 1-year medium-term lending facility (MLF) by 10 basis points earlier this week.

In the article, Dong notes the PBOC’s increased use of monetary policy tools, especially given that China’s inflationary pressures are much weaker compared to other major economies.

“The [monetary policy execution] The report puts a lot of emphasis on inflation … but it also says that China’s price level will maintain overall stability now for the whole year,” Dong wrote.

“Price conditions in China are now different from price conditions in Europe and North America, and the future inflationary pressure will not be great at all.

“The current cycle of economic inflation in Europe and North America is largely driven by the stimulus of economic growth and the adoption of loose monetary and fiscal policies, leading to excess aggregate demand and an across-the-board rise in commodity prices.

“However, China’s monetary policy has been relatively stable in recent years, market liquidity has remained reasonably adequate, and we have not implemented flood-style irrigation… Data for July show that CPI rose 2.7% y/y , which is below consensus-expectations of the market.”

For this reason, Dong expects that in the future we can expect a “change in thinking” and more efforts to balance stable growth with preventing inflation.

“The main goal is to stabilize growth,” Dong wrote. “Macro policy needs to increase in intensity and we need to take proactive measures to boost demand.”

Dong expects China to “expand the intensity of monetary policy implementation” on four fronts, including:

  1. Effective use of quality tools to maintain moderate growth of the money supply and strengthen the stabilization of credit growth. “Currently, the weighted average provisioning ratio of China’s financial institutions is 8.1%, and there is still room for further downward adjustment… at the same time, a moderate reduction in the lending rate (LPR), particularly the 5-year LPR, will encourage a moderate decline. enterprise demand for medium-term and long-term financing.
  2. More emphasis on the role of structured tools. “We need to expand targeted blood transfusions in key sectors and industries, optimize the structure of loans. The [Monetary Policy Execution Report] created a column on developments and trends in the credit structure to place greater emphasis on adjustments to the credit structure. We must effectively use targeted reductions in reserve requirements and micro and small credit support tools for financial inclusion.” Dong also called for an increased share of loans for financing, technological innovation and green development to “offset the decline in real estate loans.”
  3. Expanding the intensity of real estate financing policy adjustment. “We should better support the stable and healthy development of the real estate market, and speed up the adjustment and optimization of real estate financing policies… as for housing loans, we can reduce the down payment ratio and interest rates on loans, and explore the opening of three housing lending policies in cities of the third and fourth level”.
  4. Additional development of transmission mechanisms of monetary policy. “We must expand effective transmission and positive incentives for financial institutions, and appropriately relax macroprudential assessments (MSAs) to increase the willingness of financial institutions to lend.” Dong also urged small and medium-sized banks to relax the conditions for applying for reloans to support agriculture and small businesses, as well as channels for small and medium-sized banks to replenish their capital, including issuing perpetual and convertible bonds. “We should provide preferential support for the listing of small and medium-sized banks, expand channels for the sale of problem loans, and strengthen the capital strength and ability for the healthy development of small and medium-sized banks.” Fudan W. Economist calls on China to “tighten” monetary policy in the second half of the year

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