Recently, China has been dithering in reforming its economic policies. The State Council has repeatedly reaffirmed its determination to maintain steady economic growth; but it has continued to slow. On the one hand, the central government asked local governments to reduce their reliance on the real estate industry for economic development and enforce strict measures against property speculations; on the other hand, it turned a blind eye to attempts to lift curbs on real estate development, which may terminate the current periodical adjustment of the country’s housing market.
Even though such a dilemma exists, the Central Bank’s recently announced Monetary Policy for the Second Quarter did not include any guidelines for the near future, except two tasks the report listed as “basic”, namely: exercising monetary control in the drive to deepen reform; and using financial innovation to enhance the banks’ capability to serve the real economy. These two tasks suggest that China’s current monetary policy aims to strike a balance between differing concerns in two ways.
First, there is a need to strike a balance between economic growth and economic reform.
China now faces the urgency of stopping a decline in its economic growth. Under this pressure, any move to readjust the current real estate market lengthens the course to putting the growth back on a fast track. That is because the rapid GDP growth over the past decade or so boosted by the real estate boom has become unsustainable and needs to be readjusted. However, once the periodical readjustment of the real estate-led economy starts, the real estate-boosted GDP growth will inevitably slide. The longer the readjustment, the stronger the momentum to slow down.
Thus, the need for the rebalance mentioned above. In other words, the Central Bank’s monetary policy must help promote steady growth in the economy and reduce the growth’s reliance on real estate development, while supporting economic reform and industrial restructuring. The loose monetary policy recently adopted by the Central Bank, such as a lowering of the deposit-reserve ratio, was part of the Central Bank’s effort to reform the monetary policy. It was designed to channel capital to the real economy in order to support weak industries and small and medium-sized enterprises. Another instance of the Central Bank’s recent reform efforts was granting the China Development Bank RMB1 trillion in supplementary loans. The Development Bank then extended the loan to local governments to help with their shantytown reconstruction projects.
These efforts are different from the usual practice of using a loose monetary policy – such as cutting interest rates and lowering reserve requirements – to stimulate economic growth. If this old practice were adopted, China’s economy would return to the path of relying on an excessive credit expansion for infrastructural investment and real estate development. And that would lead to a situation where the effort to strive for steady economic growth becomes the largest hindrance to reform. The monetary policy is aimed at striking a balance between maintaining steady economic growth and continuing a drive for reform. Stopping reform would lead to more difficulties. Therefore, the directional monetary policy will be adopted as a regular policy tool for a certain period of time.
Nevertheless, monetary policy is universal in nature, while a directional policy is specific, provisional and partially applicable. If the latter becomes regular, that may lead to statistics conveying false information, and weaken the market’s role of channeling capital. The policy itself may also become an interest carrier. It is predictable that the Central Bank will keep readjusting the monetary policy in a constant experiment of corrections.
The second balance that the current monetary policy aims to achieve is the one between the need to reduce the economy’s reliance on the real estate industry and the need to achieve a “soft landing” for the housing market. Many of China’s economic and financial problems are caused by the economy’s excessive reliance on real estate. For example, raising loans has proven too difficult and expensive for small and medium-sized enterprises, and involves too high a risk; and the financing system itself is suffering from a warped structure. That’s because the real estate-dominated economy has siphoned almost all resources, especially capital, into the housing market. A massive influx of cash not only pushed up housing market prices, but also increased the price of banking in the financial market and brought greater risks to China’s banking system. And the rampant mushrooming of “shadow banks” and local governments’ financing platforms was also the result of the economy’s reliance on real estate. Therefore, depriving the real estate industry of its leverage role in the economic growth is the main task of the Central Bank’s monetary policy this year.
Detaching real estate from economic development is also a way to burst the housing bubble. This will cause credit risks in the banking sector. The reports issued by publicly traded domestic banks indicate that many of them have seen a rapid increase in their bad loans, although their earnings growth mostly met market expectations. Housing prices had barely begun to drop before the real estate credit showed signs of crisis. If housing prices plunge drastically, bad loans will surge while local governments’ financing platforms will be exposed to even greater risks. Then, would things get worse and trigger a regional or overall crisis in China’s banking system? That’s what the Central Bank’s monetary policy has to deal with.
And that’s why the Central Bank neither expressed consent nor voiced opposition to local governments’ moves of lifting restrictions on the real estate industry, or even forcing local banks to relax credit curbs. By acquiescing, the Central Bank will try to help achieve a balance between real estate detachment and a soft-landing in the housing market.
So, the current monetary policy is to guarantee “two balances”. It is unlikely that the Central Bank will go for an all-round quantitative easing. It will still concentrate its efforts on directional credit loosening and the prevention of bank risks caused by the plummeting of housing prices. These are expected to be the focus of the monetary policy in the next few months.
Yi Xianrong is a researcher at the Financial Institute of the Chinese Academy of Social Sciences.