China may be pursuing a more accommodative monetary policy, but it will have to step carefully
Analysts believe that any easing by the People's Bank of China will be subtle, especially while the United States tightens its monetary policies
Even as the US tightens policy, China’s central bank is likely to take a cautious approach to loosening monetary policy.
The People’s Bank of China will have to strike a fine balance in moving in the opposite direction, as authorities maintain a close check on inflation and the rising cost of US dollar-denominated debt.
According to analysts, relaxing monetary policy may not take the form of overt actions such as reducing the amount of cash that banks must store as reserves or the RRR — one of the central bank’s several regulatory tools. Instead, China is more likely to make selective measures.
Divergence with the United States, for example, could have a wide range of market implications.
Many Chinese enterprises, particularly property developers, have raised huge sums of US dollar-denominated debt, according to Jefferies analysts in a report released Monday. When the US dollar rises or US yields begin to rise as a result of the Federal Reserve’s projected slowdown in asset purchases, this will become more difficult to repay.
Last week, the Federal Reserve revealed meeting minutes that showed the bank is on the verge of tightening, maybe as soon as next month. The move comes as officials in the United States are concerned about the long-term sustainability of inflation.
China is up against the same problem. From a year ago, the producer price index, which measures factory production costs, increased by a record 10.7% in September.
“The prospective scope of monetary policy easing is limited due to persistent inflationary pressure,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. Many economists, though, are more convinced than ever that China will need to ease.
