Antai Insight


Wu Wenfeng: China's Monetary Policy will be Both Stable and Flexible

Alumni and Public Relations Office 2017-06-28

Recent moves by major central banks around the world, and the upcoming tests for financial institutions in late June, have drawn more attention to China's future monetary policy trends.

Professor Wu Wenfeng from Antai College suggests that the effects of Federal Reserve's interest rate hike on yuan are already felt and dwindling, and with a stable economy and favourable interest and foreign exchange rate, the upward trend for China's development is evident.

Therefore, China's monetary policy will remain strategically steady and tactically flexible, providing a better setting for reform and economic transformation.

Weaker external shocks

As China engages ever deeper in the world economy, its monetary policies are bound to be more affected by policy changes in other countries. However, since the effects of many external shocks in the last few years have already been exerted, their impact right now is on a downward path.

'Take the Fed's interest rate increase as an example, the concerns it triggers mainly include capital outflow and yuan devaluation. As global financial markets absorb the expectation of interest rate rise, and the domestic authorities step up financial regulation, at present both the value of yuan and the flow of cross-border capital are relatively stable, thus limiting the policy's effect on China.'

'In addition, China's economy is in a stage of transition, with both upward and downward stress and a stable and improving trend in general, therefore the People's Bank of China (PBoC) does not need to follow the Fed in adding interest rates or shifting directions to loosening policies,' said Wu Wenfeng, Professor and Chair from the Department of Finance, ACEM.

Steadily improving domestic economy

Although downward pressure is inevitable during economic transition, the steady growing trend in China's economy is palpable, and the interest and foreign exchange rates have both been strong.

David Lipton, First Deputy Managing Director of the International Monetary Fund, predicts a 6.7% growth for China's economy in 2017, and believes it has the potential to realise substantial growth and maintain its leading advantage among the world's major economic powers.

Employment rate, one of the key indicators watched closely by policy makers, can be a case in point in this respect. In the first five months, nearly six million new jobs have been created in the country's urban area, an increase of 220 thousand comparing to the same period last year. This figure shows that the country has already achieved about 54.4% of the employment goals set by the government work report earlier this year.

At the same time, sectors such as hi-tech, equipment manufacturing and new products have all gained rapid growth, with promising products such as industrial robots and SUV enjoying healthy increase and the adjustment of traditional industries being orderly carried out. 

'Judging from annual reports of listed companies and the profit increase of industrial firms so far, China's economy is getting better in both macro and micro level,' said Professor Wu.

'Factoring in the gap between implementing policies and seeing results, the improvement could be even greater in the future.'

Previously, authorities have also strengthened control and regulation on regulatory arbitrage, idle funds arbitrage and related entity arbitrage, nudging financial market deleveraging through policy making in order to better serve the real economy. Measures like these will also further support the stable improvement of the economy and provide more manoeuvring space for future monetary policy making.


Prudent policies promoting reform

During an announcement of credit statistics in May, officials from the PBoC have pointed out that right now the running of currency credit is in a broadly normal state and the finance industry is providing reliable support to the real economy.

Commercial banks, while curbing operations such as interbank businesses, have expanded credit for the real economy, the central bank have also provided liquidity through various policy tools and have kept the liquidity neutral and moderate in the banking system.

In the future, the PBoC will continue to maintain the balance between deleveraging and sustaining liquidity, providing a favourable financial environment to supply-side reform.

Most analysts believe that the message is in tune with the current economic and financial state in China. While emphasising stability, it also clearly stated the intention to be flexible and pragmatic in tactics so as to realise the ultimate goal of supply-side reform and real economic transformation.

Professor Wu contends that 'the key to monetary policies is to promoting economic growth while avoiding financial risks. Judging from internal and external conditions facing China's economy today, the government is expected to keep its stable yet also flexible policies, using the right tools in the right moment while speeding up institution building so as to form a better financial environment.'

This article (in Chinese) was originally published by People's Daily on June 20, 2017.