Article

China’s central bank criticises Fed policy

The People’s Bank of China has been critical of the policies of Western central banks – and seeks to do things differently.

| 16 min read

China has achieved good growth this century. Its equity-market index languishes well below its peak in 2007 and its lower peak, which was in 2015. It is a living reminder that merely generating economic growth does not ensure profitable stock market investing. Growth is a good tailwind for companies when an economy is expanding, but not a guarantee of equity market success.

After a period of high growth narrowing the gap in living standards with the West, the Chinese economy should be able to grow at 4-5% a year from here, according to its government. Last year saw 4.9% growth. Inflation has been kept low and is currently at just 0.3% for the last year.

Retail sales were a disappointing 3.7% higher than a year ago in May. Car sales were down, and property remains in trouble. The authorities decided to puncture the property bubble and are managing the fallout from that decision. There was too much speculative development, too many unsold homes remaining empty – and prices had been chased too high.

Adjustment is painful and has hit growth, as there is little new development underway after years of excess. The government is at the same time seeking to gently reflate the economy after the long period of lockdown adopted to fight covid.

Why the poor performance of equities?

Plenty of credit and speculative overreach characterised the big peaks of 2007 and 2015. The government wanted to bring equities back down and has not, more recently, wanted to foster more speculation.

The collapse of the property market has left people more risk averse, and the authorities have turned more hostile to some types of private-sector activity. Meanwhile, the growing trade and political tensions between the US and China has led to divestment by some American investors from China – and acted as a deterrent to other US interests.

The US accounts for a large share of the world’s savings and investments, so being off US ‘buy lists’ makes quite a difference. Europeans too have become more concerned about the Chinese social and business model. Since the February lows there has been some resumption of interest in a market which offers lower ratings now and the prospect of reasonable growth ahead. There remain some domestic and foreign headwinds and political risks.

The People’s Bank of China (PBoC) has been critical of Western central banks, especially the Federal Reserve, for its conduct of policy in recent years. The Chinese central bank declined to follow the Western institutions with a large quantitative easing or bond-buying programme. It congratulated itself on avoiding the high inflation of the US and Europe. It kept to a money and credit target, aiming to keep M2 money growing in line with nominal gross domestic product.

The PBoC does not claim to be independent and explains how its policies are compatible with and based on President Xi Jinping’s general economic and social policies. Recently, its governor, Pan Gongsheng, set out the latest thinking on how to help bring about high-quality economic growth. He said that monetary policy will be accommodative “providing financial support for economic recovery.”

The PBoC has been cutting its loan prime rate and reducing the required reserve requirements imposed on banks to allow them to lend more. In May, wider money (M2) grew at 7%, almost 7% ahead of inflation, allowing more growth in demand. The central bank is undertaking some direct lending of its own to favoured sectors and themes connected mainly with technology advances. It is also helping with the property crisis by providing loans for affordable housing.

Property crisis remains unresolved

At the same time as allowing money and credit to grow, the central bank is seeking to rein in excess property lending from the past bubble. It is changing the way it monitors and controls commercial bank balance sheets to flush out where they have been expanded too much “through undue and irrational competition”.

It does not regulate based on an inflation forecast in the way the Western central banks have tried to do. It regulates based on “a combination of quantity and price-based regulatory measures”. It is now moving away from its old system of quantitative targets for money and credit though it still wishes to align money and credit to nominal economic growth. It wants to lead market interest rates with its policy rate setting so it is moving a little away from its cautious reform to give the market a wider role in rate setting.

The central bank frequently points out that it is seeking to run down and contain property loans. It says credit growth will not reach the old annual increases of 10% or more, despite favoured new lending to certain sectors.

The PBoC wishes to buy and sell bonds as a further way of influencing market outturns – but denies this means it is taking up the quantitative easing it avoided during the Covid-19 pandemic. This “does not mean quantitative easing. Instead, it is meant to be a channel for base money injection and a tool for liquidity management,” he said.

Mr Pan drew attention to the dangers inherent in the Silicon Valley Bank crisis in the US, concluding there is a “need to observe and evaluate the financial market situations from a prudential perspective, and correct and intercept the accumulation of market risks in a timely manner”. He drew attention to mismatch and volatility on bonds held. The PBoC, with government support, is embarking on targeted assistance to sectors and companies it likes, alongside continuing the patient work of deflating the property sector.

The PBoC may be slowly moving away from quantified money and credit targets, but it is not moving onto an inflation targeting system. It feels it won that argument over which worked best and has run criticisms of the West for some time over high inflation and big changes of central bank policies.

It now warns government and people that the old growth rates of 10% or more in credit are the past, and that new credit must be more efficient and better deployed. It wants a stable renminbi and looks forward to lower rates in the US and Europe to make a stable currency more likely. It looks as if they are proceeding with care, though winding up the property excesses is not easy. The government will direct the need to blend the central bank’s approach to its general growth policy towards local government, infrastructure investment and excess capacity in parts of manufacturing.

China has achieved good growth this century. Its equity-market index languishes well below its peak in 2007 and its lower peak, which was in 2015. It is a living reminder that merely generating economic growth does not ensure profitable stock market investing. Growth is a good tailwind for companies when an economy is expanding, but not a guarantee of equity market success.

After a period of high growth narrowing the gap in living standards with the West, the Chinese economy should be able to grow at 4-5% a year from here, according to its government. Last year saw 4.9% growth. Inflation has been kept low and is currently at just 0.3% for the last year.

Retail sales were a disappointing 3.7% higher than a year ago in May. Car sales were down, and property remains in trouble. The authorities decided to puncture the property bubble and are managing the fallout from that decision. There was too much speculative development, too many unsold homes remaining empty – and prices had been chased too high.

Adjustment is painful and has hit growth, as there is little new development underway after years of excess. The government is at the same time seeking to gently reflate the economy after the long period of lockdown adopted to fight covid.

Why the poor performance of equities?

Plenty of credit and speculative overreach characterised the big peaks of 2007 and 2015. The government wanted to bring equities back down and has not, more recently, wanted to foster more speculation.

The collapse of the property market has left people more risk averse, and the authorities have turned more hostile to some types of private-sector activity. Meanwhile, the growing trade and political tensions between the US and China has led to divestment by some American investors from China – and acted as a deterrent to other US interests.

The US accounts for a large share of the world’s savings and investments, so being off US ‘buy lists’ makes quite a difference. Europeans too have become more concerned about the Chinese social and business model. Since the February lows there has been some resumption of interest in a market which offers lower ratings now and the prospect of reasonable growth ahead. There remain some domestic and foreign headwinds and political risks.

The People’s Bank of China (PBoC) has been critical of Western central banks, especially the Federal Reserve, for its conduct of policy in recent years. The Chinese central bank declined to follow the Western institutions with a large quantitative easing or bond-buying programme. It congratulated itself on avoiding the high inflation of the US and Europe. It kept to a money and credit target, aiming to keep M2 money growing in line with nominal gross domestic product.

The PBoC does not claim to be independent and explains how its policies are compatible with and based on President Xi Jinping’s general economic and social policies. Recently, its governor, Pan Gongsheng, set out the latest thinking on how to help bring about high-quality economic growth. He said that monetary policy will be accommodative “providing financial support for economic recovery.”

The PBoC has been cutting its loan prime rate and reducing the required reserve requirements imposed on banks to allow them to lend more. In May, wider money (M2) grew at 7%, almost 7% ahead of inflation, allowing more growth in demand. The central bank is undertaking some direct lending of its own to favoured sectors and themes connected mainly with technology advances. It is also helping with the property crisis by providing loans for affordable housing.

Property crisis remains unresolved

At the same time as allowing money and credit to grow, the central bank is seeking to rein in excess property lending from the past bubble. It is changing the way it monitors and controls commercial bank balance sheets to flush out where they have been expanded too much “through undue and irrational competition”.

It does not regulate based on an inflation forecast in the way the Western central banks have tried to do. It regulates based on “a combination of quantity and price-based regulatory measures”. It is now moving away from its old system of quantitative targets for money and credit though it still wishes to align money and credit to nominal economic growth. It wants to lead market interest rates with its policy rate setting so it is moving a little away from its cautious reform to give the market a wider role in rate setting.

The central bank frequently points out that it is seeking to run down and contain property loans. It says credit growth will not reach the old annual increases of 10% or more, despite favoured new lending to certain sectors.

The PBoC wishes to buy and sell bonds as a further way of influencing market outturns – but denies this means it is taking up the quantitative easing it avoided during the Covid-19 pandemic. This “does not mean quantitative easing. Instead, it is meant to be a channel for base money injection and a tool for liquidity management,” he said.

Mr Pan drew attention to the dangers inherent in the Silicon Valley Bank crisis in the US, concluding there is a “need to observe and evaluate the financial market situations from a prudential perspective, and correct and intercept the accumulation of market risks in a timely manner”. He drew attention to mismatch and volatility on bonds held. The PBoC, with government support, is embarking on targeted assistance to sectors and companies it likes, alongside continuing the patient work of deflating the property sector.

The PBoC may be slowly moving away from quantified money and credit targets, but it is not moving onto an inflation targeting system. It feels it won that argument over which worked best and has run criticisms of the West for some time over high inflation and big changes of central bank policies.

It now warns government and people that the old growth rates of 10% or more in credit are the past, and that new credit must be more efficient and better deployed. It wants a stable renminbi and looks forward to lower rates in the US and Europe to make a stable currency more likely. It looks as if they are proceeding with care, though winding up the property excesses is not easy. The government will direct the need to blend the central bank’s approach to its general growth policy towards local government, infrastructure investment and excess capacity in parts of manufacturing.

The PBoC would favour a bit more inflation.

The PBoC would favour a bit more inflation.

China has more shots in its locker to stimulate its economy. There may well be more rate cuts to come and further relaxations of commercial bank regulations. There may be further stimulus packages to promote particular sectors and activities. There will be more support or refinancing of properties caught up in the credit excess.

Whilst it denies a Western-style quantitative easing programme, it may use bonds to boost market liquidity. The PBoC would favour a bit more inflation. Given the knock to confidence from property and past equity-market falls, and from attacks on some of China’s more successful entrepreneurs, it will take higher wages to boost consumption in the way the economy needs.

China has more shots in its locker to stimulate its economy. There may well be more rate cuts to come and further relaxations of commercial bank regulations. There may be further stimulus packages to promote particular sectors and activities. There will be more support or refinancing of properties caught up in the credit excess.

Whilst it denies a Western-style quantitative easing programme, it may use bonds to boost market liquidity. The PBoC would favour a bit more inflation. Given the knock to confidence from property and past equity-market falls, and from attacks on some of China’s more successful entrepreneurs, it will take higher wages to boost consumption in the way the economy needs.

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China’s central bank criticises Fed policy

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