Catering to the New Normal

China's central bank vows to adapt the country's monetary policy to its slowing economy

FUELING AGRIBUSINESS: Tibetan women weave wool in a local factory in Xigaze, Tibet Autonomous Region. The factory enjoys favorable loans from the local branch of the Agricultural Bank of China (XINHUA)

In a recent monetary policy report, the People's Bank of China (PBOC), the country's central bank, described for the first time the "new normal" of moderate growth in China—the economy has switched from high-speed growth to a deep-seated transformation of growth patterns.

Growth has moderated following the country's rebalancing efforts while reform has unleashed much vitality to prop up economic development. Traditional growth drivers have weakened while newly emerging sectors are flourishing, read the China Monetary Policy Report for the Second Quarter of 2014, which was released by the central bank on August 1.

Experts say China's monetary policy should be adapted to the "new normal" of macroeconomic conditions. Looking ahead, the central bank insisted on "maintaining a stable money supply while optimizing the lending structure."

Policy focus

Ma Jun, chief economist with the Research Bureau of the PBC, said the central bank should improve its adaptability to the slowing economy. First, it should make sure whether or not there is enough potential in growth momentum so as to avoid overuse of stimulus measures. It should also decide whether it wants to maintain GDP growth or employment rates. Finally, if the economy can't be completely weaned off stimulus, the central bank should seek to avoid or mitigate the many potential negative after-effects brought about by the stimulus, such as overly high leverage ratios and overcapacity, he said.

"In the long run, the central bank's regulation target should be shifted from maintaining GDP growth rate to ensuring a stable job market," said Ma.

Lian Ping, chief economist with the Bank of Communications, said maintaining growth, managing risks and adjusting deflation in the manufacturing sector should be the most important targets of China's monetary policy.

"At present, the Chinese economy has entered a 'new-normal' stage, featuring stable and moderate growth, low inflation and a healthy job market," Lian said.

"The central bank used to fine-tune its total money supply. In the future, it will be less likely to adjust the total supply and will instead focus on targeted adjustment of certain sectors to support China's restructuring efforts," Lian said.

Wen Bin, a researcher with Minsheng Securities, told China Business News that China's monetary policy is confronted with three challenges.

"In the short run, it needs to maintain stable growth by stimulating total demand. In the mid-term, it needs to cope with new challenges engendered by decreasing funds outstanding for foreign exchange transactions. In the long run, it needs to create a monetary regulation system based on price after market-based interest rate reform is completely carried out in China," Wen said.

"Due to these challenges, the central bank has to combine short-term regulation with long-term reforms," Wen said.

A report from China International Capital Corp. Ltd. (CICC) said it would be almost impossible for the central bank to loosen monetary supply in the coming months.

As of the end of June, M2, a broad measure of money supply that covers cash in circulation and all deposits, reached 121 trillion yuan ($20 trillion), up 14.7 percent year on year. New yuan-denominated loans amounted to 5.7 trillion yuan ($930 billion), 659 billion yuan ($107 billion) more than the same period last year, according to the central bank.

"In the first-quarter monetary policy report, the central bank said lending and total social financing enjoyed a reasonable and stable increase while total money supply slightly edged down. But in the second-quarter report, it said lending and total social financing have increased relatively fast while total money supply has rebounded substantially. This change in phrasing shows that the central bank thinks there's enough liquidity in the market," said CICC in its report.

"But the central bank also promised to lower financing costs, which means it's unlikely to tighten money supply," the report stated.