BIZBIZCOMMENTCOMMENT
B6 Wednesday August 7, 2019
By Lian Ping
A
mid increasing external uncer-
tainty, slowing global economic
growth, the Fed’s interest rate
cut and continuing downward pressure
on the Chinese economy, the market
is looking to see China further ease its
monetary policy. How much room is
there for monetary easing in China?
Since this year, the rhetoric from
monetary authorities on policy has been
split. One path is to continue counter-
cyclical adjustments, while the other is
to implement counter-cyclical adjust-
ments in a timely and appropriate man-
ner. It is not hard to discern that the
latter course indicates authorities are
somewhat reserved on counter-cyclical
adjustments. The change in offi cial
tone signifi es that although there is
room for monetary policy easing, it is
subject to a series of factors.
Since the start of 2018, China’s cen-
tral bank has enacted fi ve overall and
structural cuts to reserve requirement
ratio (RRR), reducing the average bank
deposit reserve ratio to 11 percent, about
3 percentage points lower than the 2017
average. Meanwhile, the central bank
has used various open market tools
to increase short- and medium-term
liquidity and drive down interest rates.
As a result, market liquidity has been
maintained suffi ciently, and even quite
abundantly at certain stages.
By the end of 2018, supplies of
narrow money (M1) and broad money
(M2) grew 1.5 percent and 8.1 percent
year-on-year, respectively. By the end of
June this year, the growth rates for M1
and M2 rebounded to 4.4 percent and
8.5 percent.
Considering that the growth in nom-
inal GDP has slid to 8.3 percent, the
growth rate of M2 is basically matching
nominal GDP. Moreover, the monetary
multiplier has recorded a big change,
climbing from a low of 5.41 during the
second half of 2018 to 6.14 in June
2019, a historical high. Apparently,
it is inappropriate to further loosenmonetary policy under such a liquidity
situation. Interest rates have continued
to fall the domestic market since the
second quarter of 2019. The current
level of real interest rates is much lower
than the level a decade ago. In principle,
China’s interest rates should be higher
than in the US, because the existence of
a reasonable interest spread is favorable
to maintaining net capital infl ows. In
this sense, even though the Fed an-
nounced an interest rate cut, the space
is still limited for interest rate cuts in
China.
Except for the relatively stable
leverage ratio at the corporate sector,
leverage levels of the government and
residents have increased since 2018.
From the beginning of 2018 to the fi rst
quarter of 2019, leverage ratios of the
government and residents went up
from 35.77 percent and 50.38 percent
to 37.67 percent and 54.28 percent,
respectively, while the corporate sector
only saw leverage ratios decline from
158.9 percent to 156.88 percent. So the
overall leverage level increased by about
3.8 percentage points during the same
period.
In my
opinion,
it seems
an exag-
geration
to worry
too much
about cur-
rent leverage
and debt levels.
Some economies,
with even higher
leverage levels
than China, still
maintain economic
stability for a long
time. Neverthe-
less, the fact that
China’s macro
leverage ratio is
indeed relatively
high will unlikely
cause any funda-
mental change to
its leverage stabiliz-ing policy in the near future, unless the
economy comes under major shocks or
faces an obvious stall. With the lever-
age ratio climbing, a further loosening
of monetary policy may risk lifting the
leverage ratio signifi cantly, which goes
against deleveraging or stabilizing lever-
age policies.
With weakening internal and
external demand, the economy faces
downward pressure, and with the
current account surplus declining,
depreciation may still be the main risk
to the yuan exchange rate in the future.
As monetary policy is an important
factor, sometimes even a decisive factor,
aff ecting the exchange rate movement,
a loose monetary policy will inevitably
put depreciation pressure on the yuan.
Thus, for the sake of keeping the yuan
exchange rate basically stable and re-
ducing depreciation pressure, authori-
ties are not advised to further loosen the
monetary policy easily.
All in all, China’s nominal interest
rate and real interest rate are currently
both at low levels from the perspective
of history and the world market. So fur-
ther cutting interest rates sharply may
only produce a limited eff ect, and such
a move is subject to multiple factors.
Meanwhile, the current required
RRRs at banks have generally reached
an average of 11 percent after sev-
eral downward adjustments, which is
already quite low in the international
market, representing limited room for
any further slash.
Nevertheless, it is still possible to
loosen monetary policy appropriately if
the macro economy suff ers any major
setback in the future. With the advance
of interest rate marketization, the use of
price-based tools will gradually become
the main approach for adjusting mon-
etary policy.The author is chief economist with Bank of
Communications. bizopinion@globaltimes.
com.cnYuan’s trend shows Beijing has initiative in trade war
Is there room for future monetary easing in China amid global economic uncertainty?
By Hu Weijia
The US decision to label China
a so-called currency manipula-
tor is likely to push the yuan’s
ongoing internationalization.
Although China has over-
taken the US to become the
world’s largest trading nation,
the share of the yuan in global
central bank reserves was only
1.84 percent in the second
quarter of 2018, as the US dol-
lar remains the major global
reserve currency. China clearly
wants the yuan to play a bigger
global role, but the US sees a
threat from the yuan’s interna-
tionalization.
The ongoing trade war is
prompting China to make stra-
tegic adjustments for a pos-
sible decoupling of its economy
from the US. In that scenario,
China is likely to reduce its de-
pendence on the US dollar and
push the yuan’s global use. The
process of the yuan’s interna-
tionalization is likely to trigger
more confl icts between Beijing
and Washington.
If the two countries are des-
tined to come into confl ict over
the yuan’s internationalization,
the odds are: the sooner, the
better.
US President Donald
Trump has long talked about la-beling China a currency ma-
nipulator. It is unavoidable
that issues will surface in the
process of the yuan’s interna-
tionalization.
Designating China a curren-
cy manipulator has long been
an important part of US deter-
rence to slow down the yuan’s
internationalization process.
But once the US announced
that step, its deterrent force
substantially weakened. Now
China can push the yuan’s in-
ternationalization without mis-
givings.
On Monday, the yuan slip
past 7 per dollar for the fi rst
time since 2008, but it was
just a normal market reaction
to Trump’s latest tariff s threat.The Chinese government did
not manipulate its currency
and it allowed the yuan to fall
to refl ect a supply-demand
balance on the market. China
holds the largest foreign-cur-
rency reserves in the world. It
would be very easy for the gov-
ernment to support the yuan
with its foreign-currency re-
serves, but China didn’t do that.
China made full preparations
to face a complex situation after
the yuan plunged beyond 7 per
US dollar.
China’s central bank reiter-
ated on Monday that it is con-
fi dent in its ability to keeping
the yuan’s exchange rate basi-
cally stable. Therefore, China
dared to give it a try and al-low a free fl uctuation on the
currency market on Monday.
China’s ability to maintain eco-
nomic stability has been vastly
strengthened, giving the coun-
try’s policymakers more con-
fi dence in pushing the yuan’s
internationalization.
The yuan’s sudden slump
against the US dollar on Mon-
day seems to have exceeded US
expectations and triggered a hot
debate among US observers.
This suggests China now has
the initiative in the trade war
and won’t be content to only
play defense.The author is a reporter with
the Global Times. bizopinion@
globaltimes.com.cnE
YEONECONOMY
Illustration: Luo Xuan/GTPage Editor:
[email protected]