China Will Control Monetary Supply Floodgates, Maintain Neutral Stance Next Year
Xu Yanyan
DATE:  Dec 22 2017
/ SOURCE:  Yicai
China Will Control Monetary Supply Floodgates, Maintain Neutral Stance Next Year China Will Control Monetary Supply Floodgates, Maintain Neutral Stance Next Year

(Yicai Global) Dec. 22 -- China has set the tone for its monetary policy next year.

Prudent monetary policy should remain neutral, and China should control the floodgates of monetary supply as the country witnessed reasonable growth in credit and social financing, the central government said after the Central Economic Work Conference that concluded on Dec. 20.

China has been implementing its 'prudent and neutral' monetary policy for over a year, but a subtle change in the wording of statements at this year's economic conference sparked heated discussions among economists.

The requirement that "prudent monetary policy should remain neutral" was similar to statements issued in previous years, but it gave greater prominence to the importance of maintaining a neutral stance, said China Financial Futures Exchange Research Institute Chief Economist Zhao Qingming.

The central bank will tighten its grip on money supply and may even strain monetary policy a bit further, an analyst told Yicai Global.

However, the government's emphasis on a 'neutral stance' means that the central authorities will take a more flexible approach to tackling volatility and liquidity risks on the financial market, the analyst said.

The constant emphasis placed on 'prudence' in recent years is illustrative of the determination of top-level policymakers to create a stable monetary and financial climate that is conducive to economic growth, and the monetary policy is characterized by a neutral stance at the practical level, opined Chen Yi, a senior researcher at the Bank of Communications' financial research center.

Neutrality is a means to an end -- that is, creating a prudent monetary and financial environment, Chen said. The monetary authorities will flexibly use multiple tools to weather market volatility and mitigate potential liquidity risks within the financial system to maintain macro-level liquidity and interest rates at a reasonable level, said Chen.

"Credit and social financing will see reasonable growth next year," CITIC Securities Chief Fixed Income Analyst Ming Ming said. "This means that growth will be kept within a reasonable range, because a major slowdown in credit and financial growth would adversely affect enterprises' business expansion as a result of funding constraints, and excessive growth could lead to high financial risks."

The consensus on the market over the past year or so has been that China has maintained a neutral monetary policy with a tilt toward slight tightening, and money market rates and the cost of financing has increased for industrial businesses, Zhao said.

With other major economies normalizing their monetary policies, China will likely follow suit and hike money market rates.

"The floodgates of monetary supply should be controlled," sounds harsher than the previous statement that called for "effective adjustment of the floodgates," Ming said. Controlling the floodgates means that the central bank will use quantitative and price regulation tools in a way that forms a neutral liquidity environment, Ming said.

Changes in the wording of reports indicate that monetary policy will probably tighten further next year, said Deng Haiqing, chief global economist at JZ Securities.

The government will still pursue a two-pronged (quantity-price) monetary strategy next year, where "the macroprudential policy seeks to curb financial leveraging and encourage deleveraging by through regulatory measures, and the monetary policy will reduce leverage by adjusting long-term interest rates," Ming said.

The central bank will continue to pump money into specific businesses and sectors via targeted reserve requirement ratio cuts, open market operations and standing lending facilities, said Ming. It will push forward restructuring in favor of inclusive finance, ensuring steady economic growth and economic resilience, he said.

The People's Bank of China will raise interest rates in line with the US Federal Reserve's rate hikes to keep the interest spread between the countries stable, Ming said.

The bank will adjust the RRR for specific businesses and sectors to avert one-sided expectations about monetary policy, Chen said. Authorities will routinely use reverse repurchase and structural tools as 'quantitative and price' regulation tools to maintain 'neutrality' in monetary policy, said Chen.

The central bank will "hold fast to the bottom line that no systemic financial risks should occur," Deng said. The government will probably not substantially tighten monetary policy next year, and the chance of China experiencing a liquidity crunch of on par with the one in the second half of 2013 is extremely slim, as dictated by the fundamental objective of the 'prudent and neutral' monetary policy, said Deng.

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Keywords:   Monetary Policy,Central Bank,Neutral Stance