China’s Loose Monetary Policy Faces Challenges and Constraints
In recent times, there has been a growing consensus that China’s loose monetary policy is vital in boosting the economy. However, the market seems to feel that the policy lacks the expected punch. Despite the clear downward trend in the economy, both monetary and fiscal policies, including the central bank’s efforts, appear to fall short of market expectations.
Unlike western developed countries, China’s monetary policy operates differently. The central bank does not solely rely on voting to form resolutions but instead has a variety of forms and policy tools at its disposal, including interest rates. It is crucial to understand the nuances of China’s monetary policy in order to grasp the challenges it faces.
Firstly, it is important to recognize that monetary policy is primarily a short-term aggregate demand regulation policy. This means that it aims to adjust the overall demand in the economy for a short period. Understanding this perspective is essential in assessing the effectiveness of monetary policy and providing context to the background of its implementation.
Secondly, it is necessary to delve into the current issues, challenges, and constraints that monetary policy faces. One must stand in the shoes of the central bank governor and consider the factors they would take into account when formulating policy decisions. The responsibility and pressure of exchange rate regulation and stabilization, including capital control, ultimately falls on the central bank. These factors significantly affect the degree of effectiveness of monetary policy.
The market, including prominent scholars like Mr. Yu Ze, have been advocating for loose monetary policies such as interest rate cuts. The central bank has responded to these calls by reducing the benchmark interest rate by 10 basis points a few weeks ago. It has also urged deposit rates to drop and seen a general decline in loan interest rates. However, these measures have not been as apparent as expected, especially considering the impact of the pandemic.
The economic growth target set by both the central and local governments for this year is approximately 5%. This target reflects caution due to the disturbances caused by the base effect and the low base of last year’s economic growth rate. The cautious economic growth target has been emphasized by the general secretary in his speeches, which have urged policymakers to avoid rushing and to follow the deployment of the Party Central Committee and the State Council.
Although monetary policy has shown a relatively fast response to the economic situation, with loose nominal interest rates and expanding monetary aggregates, fiscal policy may face some challenges in controlling its direction. The response to the economic situation seems to lack the desired intensity, and fiscal growth may even decline.
Examining the data from the first quarter, it is evident that the economy is beginning to recover spontaneously as the peak of the pandemic passes. The year-on-year growth rate of gross domestic product (GDP) in the second quarter is expected to be between 6.5% and 7% based on last year’s low base. While some may argue that this growth rate is not high, it aligns with this year’s economic growth target, which makes it acceptable.
However, policymakers need to consider whether they should pay more attention to the year-on-year growth rate or the chain growth rate when faced with conflicting data. Furthermore, concerns over statistical problems and sample selection in the unemployment data raise questions about the reliability of the youth unemployment rate. Despite these concerns, policymakers are observing a downward trend in the overall surveyed unemployment rate, which aligns with their goals of stabilizing employment and growth.
In conclusion, China’s loose monetary policy is undoubtedly essential to the economy, but it faces challenges and constraints that affect its effectiveness. The differences in China’s monetary policy compared to western developed countries, along with the responsibilities and pressures placed on the central bank, contribute to the perceived lack of strength in the policy. Understanding the intricacies of China’s monetary policy and its current context is crucial in assessing and addressing the challenges it faces.