Stronger restrictive monetary policy needed to meet ‘stabilizing expectations’ for China – Analysis – Eurasia Review
By Wei Hongxu*
The escalation of the war in Ukraine and the series of sanctions against Russia by Europe and the United States have increased volatility in global financial and energy markets. Heightened geopolitical risks have also had a serious impact on the global economy. International institutions such as the IMF and the World Bank have warned one after another that China’s economy will face new challenges as energy supply and demand fluctuate and power distortions supply chain would intensify. This change of situation has already affected China’s domestic capital market. Recently, the common stock (A-share) market has been volatile, reflecting investors’ gloomy outlook on China’s capital market and economy. According to behavioral economics theory, changes in expectations will affect future economic activity. It is not only a matter of economic confidence, but it also affects the behavior of residents and businesses in the future on economic activities such as consumption and investment, which will have a substantial impact on micro and macroeconomics. The ANBOUND researchers believe that China will need to adapt and react to macroeconomic policies, particularly to promote further monetary policy easing to tame market concerns and provide substantial support for “steady growth”.
In both sessions this year, the government work report highlighted the goal of achieving 5.5% economic growth this year, while emphasizing the increase in macro- policy to support the economy. According to the current market reaction, some academics and research institutes believe that the 5.5% economic growth target has dropped significantly from last year’s 8.1% economic growth rate. However, due to the chaos caused by the COVID-19 pandemic, the average growth rate over the past two years was only 5.1%. Therefore, when the impact of the pandemic is removed and the economy returns to “normal”, it is difficult to achieve the economic growth target of 5.5% this year. Further endogenous power formation is necessary and also requires macro-policy support to stabilize demand.
Some scholars have mentioned that the current 5.5% target has a positive effect on building market confidence and expectations, but to achieve the economic growth target, the main route is to build infrastructure to support the economy and wait for the real estate market to stabilize. . Pandemic measures are expected to be scaled back, allowing consumption to rebound. However, the market focus remains primarily dependent on the improvement in the real estate market, and there is little “enthusiasm” for expansion infrastructure. In this situation, the “stabilizing anticipation” effects of a positive fiscal policy are still limited. Judging by the latest CPI and PPI data, the consumer price level continues to depress while the producer price level has increased. This represented the fact that the development of China’s domestic consumption demand and investment needs are continuously decreasing, while the pressure exerted on business spending by the PPI remains constant. Coupled with the recent continuous fluctuations in the A-share market, various situations show that the evolution of market expectations always reflects the contradictions on the demand side. This means that China’s overall economic growth will always be a “drilling down” process. Although fiscal spending will increase this year, in terms of China’s current economic size, its intensity remains in the “stable” category, and monetary policy support and coordination are still needed to unleash policy effectiveness. of relaxation.
At the same time, ANBOUND also pointed out that the Russian-Ukrainian crisis has further worsened the international geopolitical environment and increased uncertainty in the global economy. The evolution of the current economic situation shows that the market still has an urgent need for macroeconomic policies, especially monetary policy support. Therefore, ANBOUND researchers believe that there is still a need for further monetary policy easing at present to help the economy achieve a “soft landing” as soon as possible by freeing up headroom.
Since the fourth quarter of last year, monetary policy has eased and provided substantial support for economic stability through an overall moderate reduction in the reserve requirement ratio (RRR) and interest rates. However, after China’s Spring Festival, the pace of this continued easing subsided and market liquidity was recycled. On the one hand, the market needs to digest the impact of the easing policy and improve the effectiveness of the policy; on the other hand, it is also a signal for the policy to remain stable, to avoid misleading the market and causing a “cascade”. However, in terms of forward-looking, precise and sustainable monetary policy, in view of the new situation and changing market expectations, monetary policy should be adjusted quickly, seize the time window and further cut rates market interest to stabilize in the short term. long-term market expectations and prevent panic in the capital market that would cause a chain reaction.
Judging from the current changes in the capital market, the RMB exchange rate is still showing a strong upward trend despite the intensification of international geopolitical risks and the rebound of the US dollar index. This could be the case although the Federal Reserve may end its balance sheet reduction and start raising interest rates in March. An appropriate drop in the level of interest rates will not have a significant impact on the RMB exchange rate in a turbulent international environment. Promoting further currency easing will help ease the pressure of RMB appreciation and boost the profitability of Chinese export enterprises. Increased foreign exchange liquidity and reduced financing costs are also beneficial for the domestic capital market, helping to stabilize asset prices and improve corporate profitability. With China’s economic fundamentals stable, stable domestic capital market earnings will remain attractive for international capital. Under such circumstances, the impact of changes in the international political environment on China is still manageable.
More importantly, by issuing signals to shore up the macro economy through monetary policy changes, the financial market and economic majors can reverse their bearish expectations. According to China’s existing conditions and steps, this will be the crucial key.
*Wei Hongxu, ANBOUND researcher, graduate of Peking University School of Mathematics and PhD in Economics from University of Birmingham, UK