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Decoding changes in China central bank's outlook
By Barclays economic research |
August 9, 2012, Thursday
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Print Edition
Print Edition
THE People's Bank of China published its second-quarter Monetary Policy Report on August 2. It maintained the "prudent" monetary policy stance, as expected. On the monetary policy outlook, the central bank said it will continue to use various tools (reverse repos, repos, central bank bills and reserve requirement ratios) to manage liquidity and guide market interest rates.
The PBoC highlighted that it will adjust the parameters of its dynamic operations of the reserve requirement ratios, based on economic sentiment and commercial banks' implementation of credit policies, guiding banks to better support the real economy.
With the Chinese economy at a critical juncture, and two surprise interest rate cuts in June and July, we think it is useful to study the evolution of the PBoC's thinking this year.
We compared the PBoC's views in the second-quarter report with the first-quarter report (May 10). Overall, our reading is that inflation is not likely to be a constraining factor for monetary easing in the second half.
However, the PBoC likely will remain reactive and policy moves will remain data-dependent, in part because it probably views the current 7.5-8.0 percent GDP growth as appropriate for China.
Monetary easing
We maintain our view of more monetary easing, including one more interest rate cut in the third quarter, because we are forecasting soft domestic recovery and weakening export growth.
On the domestic economy, it is probably not surprising that the PBoC maintained a benign outlook, highlighting ongoing fine-tuning policies, favorable fundamentals and significant room for investment.
It, however, also mentioned that China's potential growth rate has likely come down. Our reading is that the PBoC remains less concerned about the economic slowdown in the first half, and is more inclined to support economic structure adjustments (through credit policies), especially given its judgment of "largely stable employment conditions."
In contrast, we find striking differences in the PBoC's views on the global economic outlook and domestic inflation risks in August versus in May. It has clearly become more concerned about global growth, acknowledging for the first time since the 2008-09 crises that "a double-dip recession can not be ruled out", and that "global growth could remain subdued for a sustained period."
On the US economy, the PBoC's latest view is that "the recovery still lacks a solid foundation", compared with "visible signs of a recovery" in May.
On domestic inflation, while the PBoC highlighted demand-pull risks from expansionary policies and a pickup in household inflation expectations in the second quarter, its overall view is that inflation will be under control in the second half. The bank claiming "CPI inflation will likely rebound after August, but not by much" is in line with our forecast. Nonetheless, this contrasts with its judgment in May, in which the emphasis was still on significant upside inflation risks from various sources.
The article was based on a note issued on August 3. The opinions are their own.
The PBoC highlighted that it will adjust the parameters of its dynamic operations of the reserve requirement ratios, based on economic sentiment and commercial banks' implementation of credit policies, guiding banks to better support the real economy.
With the Chinese economy at a critical juncture, and two surprise interest rate cuts in June and July, we think it is useful to study the evolution of the PBoC's thinking this year.
We compared the PBoC's views in the second-quarter report with the first-quarter report (May 10). Overall, our reading is that inflation is not likely to be a constraining factor for monetary easing in the second half.
However, the PBoC likely will remain reactive and policy moves will remain data-dependent, in part because it probably views the current 7.5-8.0 percent GDP growth as appropriate for China.
Monetary easing
We maintain our view of more monetary easing, including one more interest rate cut in the third quarter, because we are forecasting soft domestic recovery and weakening export growth.
On the domestic economy, it is probably not surprising that the PBoC maintained a benign outlook, highlighting ongoing fine-tuning policies, favorable fundamentals and significant room for investment.
It, however, also mentioned that China's potential growth rate has likely come down. Our reading is that the PBoC remains less concerned about the economic slowdown in the first half, and is more inclined to support economic structure adjustments (through credit policies), especially given its judgment of "largely stable employment conditions."
In contrast, we find striking differences in the PBoC's views on the global economic outlook and domestic inflation risks in August versus in May. It has clearly become more concerned about global growth, acknowledging for the first time since the 2008-09 crises that "a double-dip recession can not be ruled out", and that "global growth could remain subdued for a sustained period."
On the US economy, the PBoC's latest view is that "the recovery still lacks a solid foundation", compared with "visible signs of a recovery" in May.
On domestic inflation, while the PBoC highlighted demand-pull risks from expansionary policies and a pickup in household inflation expectations in the second quarter, its overall view is that inflation will be under control in the second half. The bank claiming "CPI inflation will likely rebound after August, but not by much" is in line with our forecast. Nonetheless, this contrasts with its judgment in May, in which the emphasis was still on significant upside inflation risks from various sources.
The article was based on a note issued on August 3. The opinions are their own.
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