The trade dispute that has flared up between China and the US during the past year is causing “a lot of problems” for monetary policy implementation by the People’s Bank of China (PBoC), according Xiao Geng, a professor of practice at the Peking University HSBC Business School in Shenzhen.
“The confidence in the economy has been threatened. The private sector and foreign investment companies are all waiting to see the results of the trade war negotiations,” Xiao said. “There has been an obvious slowdown in the real sector and that prompted a relaxation in monetary policy, although it is still very cautious.”
The PBoC has cut reserve requirements for financial institutions four times so far this year.
Xiao predicts a reduction in investment and consumption triggered by an escalating trade dispute would prompt both regional and national government to approve a wave of new infrastructure projects. “It means monetary expansion will obviously accelerate in future,” Xiao said, despite the PBoC wanting to keep a tighter rein on monetary policy and credit expansion.
Such a scenario also creates a dilemma for the new Financial Stability and Development Board (FSDB), headed by vice-premier Liu He.
China created the super-oversight body at the same time as it merged the country’s main banking and insurance regulators this year to create the China Banking and Insurance Regulatory Commission earlier this year.
The aim is for the FSDB to be in charge of overall financial stability, the PBoC sets monetary and other policy while the CBIRC oversees banks and insurers.
The FSDB “oversees a lot of regional government initiatives”, said Xiao, including “regional bonds and borrowing policies”, which has become a major source of credit leverage. There was a need for a “special effort at the state council-level to really control and supervise the regional expansion”.
Xiao said the speed of increase of leverage has been reduced in China, but not the overall level. Beneath the surface, however, some restructuring has taken place to extend credit to more productive uses. “The numbers are still not pretty,” he said, but “substantively, it is in the right direction.”
New oversight regime plays to strengths
Xiao said the combination of Liu running the FSDB, Yi Gang as governor of the PBoC and Guo Shuqing as CBIRC chairman, deputy governor and party chief of the PBoC might seem an unusual hierarchy – but it works well.
Liu, a senior Communist Party official, not only operates at the state council-level but is also the key economic adviser to President Xi Jinping. This means he has sufficient authority to demand action when required, said Xiao.
As governor of the central bank, Yi Gang “is responsible for all policies”, said Xiao, “particularly on the technical side, and also international affairs”, but “he is relieved of some of the responsibilities like the party secretary who is primarily responsible for the appointments of a lot of financial institution heads”.
“Guo Shuqing is actually much better [in the party role] because he has a lot of experience both in central and regional government as well as within financial institutions. So this structure is quite new, but uses all three persons’ strengths,” said Xiao.
Capital controls stem outflows
Xiao, who is also president of the Hong Kong Institution for International Finance, said the reason there has been less pressure on the renminbi exchange rate this year compared with the stock market sell-off in 2015 is due to stricter capital controls, plus a greater confidence the exchange rate will not continue to depreciate beyond seven yuan to the US dollar.
The professor added the decision by the PBoC to issue RMB notes offshore this year was “a very important initiative to build the offshore RMB market, particularly to build the yield curve for the RMB, particularly in Hong Kong”.
He said it is important in the longer term to have a strong offshore renminbi market if Hong Kong ultimately decides to move away from its long-established US dollar peg, which is attributed as causing asset bubbles, particularly in real estate.