The People’s Bank of China signaled it may start gradually scaling back some of the stimulus measures implemented during the pandemic as the economy begins recovering and credit demand picks up.
(Bloomberg) — The People’s Bank of China signaled it may start gradually scaling back some of the stimulus measures implemented during the pandemic as the economy begins recovering and credit demand picks up.
Most of the structural tools — increasingly used by the central bank since 2020 to target specific areas of the economy — were “temporary,” Zou Lan, head of the monetary policy department, told reporters in Beijing on Thursday. The PBOC will exit the tools, most of which have a clear time period for an end, “as scheduled” after relevant problems in the economy are addressed and the policy goals are accomplished, he said.
The targeted policies include relending programs, where the PBOC provides cheap funding to banks so they can boost loans to small businesses and green technology projects. The expansion of those tools last year pushed up the PBOC’s balance sheet by the most in six years, even as other major global central banks shrank their assets.
“This year will be a transition year, with PBOC gradually rowing back on its use of structural tools, and allowing previous conventional monetary easing to feed through into domestic demand, as the economy reopens,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
That shift may already be happening. The PBOC’s data show growth in the structural tools slowed to 5% in the first quarter from 16% in the previous three months. The outstanding amount rose slightly to around 6.8 trillion yuan ($987 billion) by the end of March, according to Zou, from 6.45 trillion yuan at the end of 2022.
The figures show just how much the PBOC has come to rely on the tools to deliver stimulus to the economy, instead of conventional measures, such as the PBOC’s one-year policy loans. The latter stands at 5.1 trillion yuan, with the size of structural tools eclipsing that to make up roughly 16% of the PBOC’s overall assets now.
Back in the fourth quarter of 2022, structural tools supported a third of the net increase in total lending, according to estimates by Adam Wolfe, an emerging markets economist at Absolute Strategy Research Ltd. The programs were critical to maintaining credit growth, which stagnated last year as the economy slowed dramatically.
The PBOC’s use of structural tools in 2022 “was a tacit recognition of the ineffectiveness of conventional monetary to stabilize the economy” due to “a dearth of private sector credit demand,” according to Wrigley at Pantheon Macroeconomics.
That’s now changing, with corporate borrowing recovering rapidly after China dropped pandemic restrictions at the end of last year and swiftly reopened the country, fueling consumption. Overall credit expansion exceeded market expectations for three straight months.
The economy’s recovery may see the PBOC rely less on unconventional policy measures going forward and shift its focus back to traditional tools — like its one-year policy loans or reserve requirement ratio for banks. In March, the central bank unexpectedly lowered the ratio, a move aimed at giving banks more cash to lend to customers.
A recent research paper led by Huang Yiping, a former PBOC adviser, also throws doubt on the effectiveness of structural tools outside of emergency times. The researchers argue that some of the tools had no significant or lasting impact on bank loans to small businesses.
“It’s perhaps more suitable to use structural monetary policy during difficult times such as a financial crisis or the pandemic,” according to the paper published last week.
Many of the tools were created in order to alleviate the pandemic’s damage on sectors such as logistics, manufacturing, private businesses’ bond issuance and the delivery of housing projects. Eleven of the 15 programs have been created since late 2021, according to statements of a breakdown published by the PBOC earlier this year.
Most of the central bank loans under these programs have interest rates at around 1.75%, lower than the one-year policy rate, which is currently at 2.75%. The central government also subsidizes interest payments for some of the loan programs.
–With assistance from James Mayger.
(Updates with analyst comment.)
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