74 Finance & economics The Economist February 13th 2021
Targetingpractice
I
n economics textbooks,central banks wield power by raising
or lowering interest rates. That depiction, always a little simplis-
tic, is now badly out of date. Since the financial crisis of 2007-09,
and especially since the onset of the covid-19 pandemic, central
bankers have dramatically expanded their arsenals. They have
bought trillions of dollars in assets—mostly government bonds—
to keep economies and financial systems from freezing up. And
they have become more hands-on, trying to steer cash to “real”
businesses, not just to markets. These actions reflect both the se-
verity of the economic shock and the constraints on monetary
policy in rich countries, where short-term policy rates are already
at or below zero. But when it comes to unconventional interven-
tions, it is a central bank in a very different situation—managing
the world’s strongest major economy—that is by far the busiest.
In contrast with other central banks, the People’s Bank of China
(pboc) has refrained from expanding its balance-sheet. Yet it is ev-
er more determined to guide money flows. Since 2014 it has intro-
duced at least ten separate targeted tools to that end, and tweaked
them constantly. There have been credit facilities for small busi-
nesses and farmers, new money for the construction of affordable
housing, adjustments to banks’ required reserves if they lend to
favoured sectors, plus caps on loans to risky industries from prop-
erty to steel. Such is the scope of activity that economists in China
now distinguish between two kinds of monetary policy: “aggre-
gate policies”, like interest rates, that affect the whole economy
and “structural policies” that support this or that sector. As central
banks elsewhere gravitate towards more targeted actions, China’s
record with structural monetary policy deserves attention.
The pandemic has illustrated the merits of targeted monetary
policy. Back-stopped by central-bank facilities, Chinese banks de-
ferred loan repayments for millions of companies and issued
credit to those on the frontlines, such as makers of medical sup-
plies. A similar response has been seen in the rich world. But in
China the point of targeting goes beyond emergency relief. It is
used to achieve other goals: in a report published on February 8th
the pbocsaid structural policies were like “drip irrigation” for the
economy, helping channel financial support towards technologi-
cal innovation and environmental protection.The big attraction of structural monetary policy for China is
that, in theory, it tackles a dilemma at the heart of the financial
system: credit growth is needed to sustain rapid economic
growth, but overall debt levels are already very high, particularly
among state-owned companies. In explicitly encouraging banks
to lend to less-indebted companies in promising sectors, policy-
makers have a set of three objectives: generating more growth,
with less debt, while also modernising the economy.
To hear it from the pboc,the experience has been a resounding
success. It says it has catalysed 15.1trn yuan ($2.4trn) in “inclusive
loans” (credit to very small businesses), more than double the
amount three years ago, reaching some 32m firms in all. The aver-
age interest rate on these loans in December was 5.1%, not much
higher than the interest rate on government debt. Small business-
es, left to fend for themselves, would never enjoy such good terms.
But a closer look at the data raises questions about the efficacy
of targeting. The overall shape of the economy has changed little.
The liability-to-asset ratio for state firms—a measure of their in-
debtedness—is only slightly lower than it was five years ago, when
the pboc ramped up its structural policies. Moreover, the jump in
“inclusive loans” is misleading. Small firms, broadly defined, ac-
count for just a quarter of overall bank lending, little changed over
the years. Without targeting, perhaps the imbalances would have
been even worse. But it is hard to escape the conclusion that the
practice has had a marginal impact on financial flows.
Despite the pboc’s official bluster about structural monetary
policy, many economists who work in its regional branches are
more sceptical. They have started to crank out research papers,
mostly in Chinese, on the topic. Fu Hongrui and Zhong Zhenzhen
argue that communication is a stumbling block. For central banks
to hit their mark, it helps if companies and investors understand
their intent, so that they have the confidence to push in the same
direction. The pboc, however, provides only basic information
about its targeted operations, with scant details about who actual-
ly receives its credit. This, argue the researchers, blunts the bene-
fits. In another paper Yin Xingshan and two other pbocecono-
mists argue that structural monetary policies do not get at the
roots of China’s problems. True solutions would include trans-
forming state-owned companies into profit-focused entities and
increasing competition in the banking sector. The central bank on
its own will struggle to cure the economy’s “chronic disease”.Structural weaknesses
The pboc, which lacks formal independence, cannot very well say
no when the government wants it to be more activist. It has taken
to describing “precision” as one of the core aims of its policies. But
some of its economists worry about the consequences. Chen Ge, a
central-bank researcher, enumerates a series of risks. To obtain
special loans from the pboc, banks need to post collateral. There is
little to stop them throwing ineligible loans into the mix. The cen-
tral bank thus faces balance-sheet hazards if some of the dodgier
assets go bad. Moreover, it is hard to monitor whether banks use
the credit as promised. And if companies and banks become more
reliant on the pbocfor direct support, it will grow progressively
harder to unwind the interventions.
The answer, Mr Chen concludes, is for the government to step
in and do more with its fiscal space, taking weight off the pboc—a
prescription that will sound wearily familiar to central bankers
elsewhere. The pbocmay be following a different path. But it is ar-
riving at a similar destination. Free exchange
China leads the world in precision-guided central banking. Does it work?