China's monetary policy needs balance

By Yi Xianrong
0 Comment(s)Print E-mail, September 15, 2014
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Recently, China has been dithering in reforming its economic policies. The State Council has repeatedly reaffirmed its determination to maintain steady economic growth; but it has continued to slow. On the one hand, the central government asked local governments to reduce their reliance on the real estate industry for economic development and enforce strict measures against property speculations; on the other hand, it turned a blind eye to attempts to lift curbs on real estate development, which may terminate the current periodical adjustment of the country's housing market.

Even though such a dilemma exists, the Central Bank's recently announced Monetary Policy for the Second Quarter did not include any guidelines for the near future, except two tasks the report listed as "basic", namely: exercising monetary control in the drive to deepen reform; and using financial innovation to enhance the banks' capability to serve the real economy. These two tasks suggest that China's current monetary policy aims to strike a balance between differing concerns in two ways.

First, there is a need to strike a balance between economic growth and economic reform.

China now faces the urgency of stopping a decline in its economic growth. Under this pressure, any move to readjust the current real estate market lengthens the course to putting the growth back on a fast track. That is because the rapid GDP growth over the past decade or so boosted by the real estate boom has become unsustainable and needs to be readjusted. However, once the periodical readjustment of the real estate-led economy starts, the real estate-boosted GDP growth will inevitably slide. The longer the readjustment, the stronger the momentum to slow down.

Thus, the need for the rebalance mentioned above. In other words, the Central Bank's monetary policy must help promote steady growth in the economy and reduce the growth's reliance on real estate development, while supporting economic reform and industrial restructuring. The loose monetary policy recently adopted by the Central Bank, such as a lowering of the deposit-reserve ratio, was part of the Central Bank's effort to reform the monetary policy. It was designed to channel capital to the real economy in order to support weak industries and small and medium-sized enterprises. Another instance of the Central Bank's recent reform efforts was granting the China Development Bank RMB1 trillion in supplementary loans. The Development Bank then extended the loan to local governments to help with their shantytown reconstruction projects.

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