The Chinese economy is facing huge downward pressure in 2019. If multiple negative factors continue to stack up within China and abroad, it would be difficult for China to maintain its 6% economic growth. According to Chinese policy logic, both fiscal and monetary policies are required to contribute to economic growth. Therefore, the pressure of economic stability will inevitably be reflected in macroeconomic policies. Fiscal policy has been determined to take a more active stance. How then will monetary policy operate? This has caused significant disputes at both policy and market levels.
Looking back at 2018, the People's Bank of China has cut its required reserve ratio (RRR) four times in order to support the refinancing interest rate of small and micro enterprises. The annual money market interest rate and MLF interest rate have stabilized and declined, while the 10-year government bond interest rate dropped by about 60 BP during the year, showing the currency policy tightness has been adjusted. In 2019, the Chinese central bank cut its bank reserve requirement by 1 percentage point and determined the basic trend of appropriate easing of monetary policy this year. However, for the loose monetary policy to produce tangible results, it is not as simple as the People's Bank of China's implementation of easing policies alone.
Some Chinese economists pointed out that the Chinese monetary policy in 2019 still faces four challenges. First, China has to solve its loose currency and tight credit. The nominal GDP growth rate in 2018 may be 9.5%, but M2 and social welfare have lower growth. This is in contrast to the stability of the money market interest rate. Secondly, monetary policy, as a master tool is facing increasing heavy burden from structural goals. Monetary policy increasingly requires the joint efforts of many policies such as fiscal, taxation and industry to complete the task of stabilizing the 6% growth. The third is the orientation and operation of monetary policy, in which its effect is constrained by the smoothness of the transmission mechanism, even raising the possibility of a missed target. When actual main business entities or enterprises are not outstanding, and there is the phenomenon of pan-financialization, then it would be sufficient to reach target operational levels to achieve the policy effectiveness. Lastly, there is the issue of macroeconomic regulation and control; regardless how forward-looking, timely or precise, it can only create a better environment for structural reforms and can only be regarded as a counter-cyclical operation, never replacing the reform itself.
It should be said that the four challenges pointed out above by Chinese scholars are very relevant for the monetary policy of 2019, and the transmission mechanism to loosen monetary policy is far from operating smoothly. Monetary policy as the aggregate tool is used for the effectiveness of directed regulation, using macroeconomic regulation to replace reform. All these are the issues that deserves high attention and serious consideration in macroeconomic policy this year.
There are controversies in China regarding the "oriented easing" or "targeted drip" policies repeatedly emphasized by the central bank since 2018. As an independent think tank scholar, Chan Kung, Anbound's Chief Researcher admitted that he was very suspicious of the outcome of policy operations of the "targeted drip". Chan Kung believes that the intention of the central bank to achieve targeted easing is very healthy, and the policy direction is also desirable. However, it is unusual that the monetary policy will be implemented by the central bank in the implementation process. The reason is that the central bank is a macro-management institution, and it should not, and cannot do operations such as oriented easing and targeted drip. If the macro-management mechanism can initiate and succeed in micro-industry management, it only goes to show that there is no micro-management in China, and that enterprise and industrial management are also lacking in China, and that everything seems to be managed by a single institution. Therefore, the "targeted drip" of credit by the central bank is something that is definitely overdone.
If the central bank's policy operations are directly related to the industry level, or even the enterprise level, this can certainly be problematic. In credit policy promoted by the central bank, when the situation requires it, supporting and defining some urgent or promising project policies would be considered as "refinement" to the extreme. However, if the policy is to be generalized and extended to the nature of the enterprise and specific category, then it would be overdone. If the central bank absolutely must conduct "targeted drip" in the grassroots enterprises or industries in practice, there should be a large number of ways to take credit, so that the central bank's targeting policy would be fruitless or deviating from the target.
The central bank is a macro-management mechanism, and monetary policy is an aggregate policy, while macroeconomics and markets are complex systems. The role of monetary policy in the market is systematic, and it is difficult to achieve true "orientated easing" and "targeted drip". The government's administrative department can express policy willingness, but the central bank, as a professional macro-management department, cannot expect and strive to achieve "targeted drip" after currency relaxation. In terms of improving the effectiveness of monetary policy, instead of pursuing "targeted drip", it would be better to commit to market-oriented reforms, to open-up various obstacles in the process of implementing monetary policy. This will loosen up the currency, which in turn relaxes market credit, ultimately converting easing policy into market activeness.
Final analysis conclusion:
Macroeconomic monetary policy should not expect "oriented easing" and "targeted drip".
