The People’s Bank of China has an opportunity Friday to spell out its monetary policy outlook for the year amid rising speculation about support for the economy — though it’s not clear how much any action will help.
(Bloomberg) — The People’s Bank of China has an opportunity Friday to spell out its monetary policy outlook for the year amid rising speculation about support for the economy — though it’s not clear how much any action will help.
Questions about the extent to which the central bank can continue to ease monetary policy are likely to be a key focus during a 10 a.m. press conference about first-half financial data hosted by Deputy Governor Liu Guoqiang.
The press conference comes as the PBOC grapples with several challenges, including the looming prospect of deflation after China’s consumer price index flattened in June. While that data boosted the case for the central bank to consider moves such as cutting interest rates or boosting credit supply, economists have warned that such actions would have only a limited impact.
PBOC Governor Yi Gang has stressed prudence with China’s monetary policy, writing in a commentary this week that the “domestic-focused” strategy is due to the central bank’s decision to avoid “simply” following major economies. The yuan’s flexibility has helped the PBOC deal with pressure from the Federal Reserve’s aggressive rate hikes, he added.
But some economists have said that weak business confidence in China, along with distortions within the financial system, mean that added credit supply may flow only to sectors considered less efficient — such as state-owned enterprises — or be used to repay debts. That would fail to move the needle on boosting actual demand.
“Depressed private sector sentiment is a headwind to demand for credit, reducing the effectiveness of policy easing,” BCA Research Inc. analysts led by Arthur Budaghyan wrote in a Wednesday report. They added that lower interest rates wouldn’t have too large an effect on boosting credit demand, given that private sector firms have likely started to work on reducing their debt burdens overtime.
A couple other constraints that are probably stopping the central bank from carrying out aggressive easing measures: rising rates in the US putting further pressure on the yuan and high debt levels in the Chinese economy.
Recent debate over whether China is falling in to a “balance sheet recession” is also shifting the focus to fiscal from monetary policy.
Several government-linked economists have highlighted deep-rooted problems involving the transmission of monetary policy and the economy that have weakened the effects of policy easing as well.
Housing sales have become markedly less sensitive to changes in interest rates in the past two years, according to Wu Ge, chief economist at Changjiang Securities Co. He’s consulted in the past for former Premier Li Keqiang.
Such thorny issues — which don’t have easy explanations — will complicate policy decisions, Wu said during a speech earlier this month at a macroeconomic symposium.
Declining returns on investment are also preventing companies from wanting to borrow and invest more, according to Yin Jianfeng, chief economist at Zheshang Bank Co. who has previously consulted with the central bank.
Yin added that local government financing vehicles — which have been a main driver for borrowing in recent years — are also struggling to generate returns and repay debt.
Higher borrowing costs among private firms as compared to state-owned ones are distorting the impact that easing has on the economy, Liu Yuanchun, president of Shanghai University of Finance & Economics, said in a recent speech.
Meanwhile, UBS Group AG economists estimated in a Tuesday report that 15-20% of new credit may be used to pay interests on old debt in 2023. That would mean much less credit is going into the real economy than it appears.
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