Will Chinese currency policies change directions?

3) The main idea behind the latest rate cut is to "reform through adjustment". On the surface, the cut was a symmetrical one. But by raising the upper limit of the range of the upward movement of deposit rates of all financial institutions to 1.3 times，it has taken a significant step forward in the rate-based reform of domestic banks. The 1.3-time expansion not only increases domestic banks' autonomy in risk-based pricing, but also calls for more competent management of risk-based pricing on the part of commercial banks. For commercial banks, deposit rates are hard constraints on their cost. Rising interest rates will not only lower banks' profit levels, but also require banks to come up with better risk pricing for their loans. Under such conditions, the time when domestic banks could win exorbitant profits with the help of preferential policies without making any efforts is gone.

Second, just as the central bank has been emphasizing, the cut doesn't mean the orientation of the prudent monetary policy has changed. However, in the face of the complicated economic conditions at home and abroad, in order to guarantee the economy's steady progress this year, the central bank has to use different combinations of monetary policy tools – either regular ones (like rates cut) or irregular ones (like various tools of targeted adjustments) – to maintain rational and sufficient liquidity in the banking system, and create a "neutral, moderate monetary and financial environment" for the economy's structural adjustments as well as transformation and upgrade. This year, the central bank's monetary policies are different from previous years. They place more emphasis on active use of policy tools and diversity of such tools.

Third, the current proposal to guarantee the prevention of regional, systematic financial crisis via comprehensive precautions marks a significant difference between the Chinese central bank's monetary policies for 2015 and 2014. In 2015, the Chinese financial system may face risks in three aspects. 1) Shocks from external markets. The Fed's interest rate hikes, the strong U.S. dollar, continuous nosedives in oil prices, additional quantitative easing by central banks of various countries, and escalating geopolitical conflicts will worsen fluctuations in the international markets. 2) Optimistic anticipations about the Chinese stock market and rampant speculation may lead to abrupt ups and downs in the market. Yet there is little hope for the insanely bullish performance of the A Shares in 2014 to repeat itself in 2015. 3) The periodical adjustments in the housing market in 2015 may trigger a debt crisis for real estate companies as well as the burst of the real estate bubble. Each of these factors may result in regional or systematic risks for China, which is why the Chinese central bank must be cautious about its monetary policies, avoid excessive "leveraging" and "deleveraging", and make sure its monetary policies return to neutrality.

It is thus obvious that the Chinese central bank is now in a dilemma regarding monetary policies. It is neither willing to embark on the track of excessive quantitative easing, nor ready to tighten currency policies. Instead, it is returning to neutrality. The current rate cut, therefore, doesn't mean an orientation change in its monetary policies.

Yi Xianrong is a researcher at the Financial Institute of the Chinese Academy of Social Sciences.