Focus on rates, stimulus allays policy concerns

2021-02-21 12:03:57

A clerk counts cash at a bank in Nantong, Jiangsu province. [Photo/Sipa] Positive vibes on China's economic growth during the first two months of the year will help ease the central bank's concerns on normalizing monetary policy, as policymakers are paying more attention to monitoring interest rates and the effects of policy stimulus globally, experts said on Friday. China had unveiled several large-scale and strong fiscal, monetary measures since the COVID-19 pandemic. Monetary authorities are now analyzing the spillover effects of these liquidity measures, said Zhu Jun, director-general of the international department of the People's Bank of China, the central bank. "From a regulatory perspective, we may face more challenges, as the large supportive policies cannot be eased out in the short term. As a result, we will need to learn how to deal with the abundant liquidity in the market," she said. The PBOC official expressed her views at a recent seminar held by the Global Asset Management Forum, a financial think tank. "The de-inflation force formed by efficient production through globalization in the previous decades will diminish, and in the next one or two decades, it may turn into a force of re-inflation. This is also a problem we have been paying close attention to recently," said Zhu. During the Lunar New Year holiday, COVID-19 was mostly well contained in China, and there were hardly any new local cases for several days. At the same time, the overseas pandemic situation has also improved significantly. Economists have started to worry about rising inflation globally, as many signs have shown that the United States may conduct a relatively large new package of fiscal stimulus policies that may cause the US economy to overheat. Commodity prices have been surging, while US bond yields have risen to the highest levels since the epidemic outbreak. Several recent developments during the Lunar New Year holiday have made monetary policy tightening more likely in the coming months, including the achievements of controlling the pandemic and the positive economic data, said Zhang Zhiwei, chief economist of Pinpoint Asset Management. "The recurrence of COVID-19 was the main risk for the government before the holidays. But now it appears that the pandemic is no longer an obstacle to a tighter monetary policy," said Zhang, who expects the January-February macroeconomic data that will be released in March, to be strong, especially for retail sales. According to the Ministry of Commerce, from Feb 11 to 17, the nation's key retail and catering companies achieved sales of approximately 821 billion yuan ($127 billion), up by 28.7 percent on a yearly basis and an increase of 4.9 percent over 2019. This year, before the holiday, the PBOC took cautious and targeted measures of offering limited short-term funds to the financial market through reverse repurchase agreements to restore market stability. The injected funds totaled 430 billion yuan, which was 750 billion yuan less than last year. The central bank's action is rare compared with previous years as it used to inject cash for longer-term use by cutting the reserve requirement ratio or one-month reverse repurchase agreements, because liquidity demand always spikes before the Lunar New Year holiday, said an article published in Financial News. The market should not pay too much attention to the scale of central bank's fund injection, otherwise "it may cause misunderstanding of the monetary policy stance," the article said. The focus should be on the interest rates that the PBOC adopts for the open market operations, as well as interest rates for the medium-term lending facility and other policy interest rate indicators. It also asked investors to monitor the benchmark interest rates over a period of time. Some policy advisers had last month said that the rising asset prices in the financial and property markets may lead to inflation and increase financial vulnerabilities. The PBOC has offered 200 billion yuan of one-year liquidity through the medium-term lending facility, according to a statement on its website on Thursday. It kept the interest rate on the funds unchanged at 2.95 percent. It also offered 20 billion yuan of seven-day reverse repurchase agreements the same day. Analysts said the fund injection will provide banks some relief after cash drainage last month triggered the worst liquidity squeeze since 2015.