Data released on April 1, 2014 shows that official Chinese manufacturing PMI in March was 50.3, slightly higher than 50.2 in February, and better than market expectation. Thus, analysis points out that China’s economy will show a steady growth in the future, but enterprises are very cautious about the market. The reason is that the final HSBC Chinese manufacturing PMI in March came at 48.0, below the 48.1 preliminary HSBC China Manufacturing PMI, hitting a new low level within 8 months. HSBC PMI indicates weak domestic demand, and also suggests a possible GDP fall to below 7.5% in the first quarter.
According to the economic figures of January and February, China’s economic downward pressure is even higher. From January to February in 2014, China domestic industrial year-on-year growth rate fell from 9.7% in December, 2013 to 8.6 in January and February, 2014, the lowest growth rate within 5 years; China’s retail sales of consumer goods declined from 13.6% in December, 2013 to 11.8% in January and February, 2014, the lowest level within 10 years; year-on-year growth rate of urban fixed-asset investment has gone down from 19.6% to 17.9%, the lowest growth rate within 12 years. Total electricity consumption across the country grew by 4.5% on a yearly basis, one percentage point lower than that in 2013.
China will “successively introduce effective measures” targeted at this downward trend, as forecast by Premier Li Keqiang, in order to keep a rational economic operation. This is because of the fact that PMI has been hovering around 50 within recent months, which shows that Chinese enterprises are facing a global weak demand and an increasing fund-raising cost. As a result, the Chinese government recently put forth some supportive policies to help China out of the risk of an economic downturn. However, the China central bank has not made any corresponding policy change.
Firstly, in view of the financial market situation at home and abroad, the China central bank is keeping its old monetary policies in consideration of the issue of how to guard against domestic systematic risk and regional risk instead of how to stimulate economic growth. Evidently, the real estate market is now faced with such problems as periodic adjustments, increasing corporate debt defaults, serious financial disintermediation caused by explosive internet financial growth and spreading shadow banks, which can trigger a big financial market risk at any moment. Based on all this, the China central bank should not change its deleveraging policy and, on the contrary, should focus on the potential risk for the coming year. If the China central bank reverses its monetary policy, it will not only be more difficult to deleverage, but may also increase the financial market risk at home and abroad.
Secondly, with the explosive growth of internet finance and the spread of shadow banks, a top-down market reform of interest rates is still under way in China. As a result of this reform, not only will traditional monetary policy oriented by bank price and quantity control soon be ineffective, but also the monetary market price mechanism will be distorted if a benchmark interest rate system is not available, and China central bank’s policy information of an open monetary market operation will be disrupted. In this case, either interest rate adjustment or reserve adjustment by the China central bank will result in a limited policy effect. Since a domestic monetary policy will have a very weak effect, China central bank will naturally be very prudent in setting monetary policies.
Thirdly, faced with the real estate-oriented economic system at present, and due to the fundamental change of financial markets at home and abroad, the China real estate market has made a nation-wide periodic adjustment. This periodic market adjustment will not only aggravate the overcapacity of many industries, but will also increase financial market risk. If the China central bank monetary policy falls into a sudden reversal, or a quick injection of liquidity is made into the market, instead of supporting the real economy in weak demand, this liquidity will go to capital-intensive real estate enterprises, to the zombie enterprises of overcapacity, and to those depending on credit by borrowing for repayment, and to the local government financial platforms. Consequently, real estate periodic market adjustment will fail to move on, real estate prices will soar, overcapacity will continue, local government debts will keep on increasing and the existing risk in China’s domestic economic and financial market will further intensify.
Finally, the U.S.QE withdrawal has a big impact on emerging markets, and these countries have basically come to an agreement on a tight credit policy. While China’s economy performs better than in these countries, if the central bank reverses its monetary policy, it may be conducive to domestic economic growth and boost the housing prices in the short term, but it will be very detrimental to the real economy.
In sum, with China economic growth on the downside, the market is expecting a big monetary policy reverse, especially when people believe that the China central bank will be more likely to change its monetary policy because the RMB depreciation has reduced China’s foreign exchange. However, faced with reality, China’s central bank will not change its monetary policy much in the near future, but rather it will still keep a steady but tight policy to get both the credit and monetary growth back on track. This could be the keynote of China central bank monetary policy for 2014.
Yi Xianrong is a Researcher at the Finance Institute of the Chinese Academy of Social Sciences.