China's central bank slows monetary easing as economy recovers

Beijing

CHINA'S central bank is slowing down the pace of monetary easing amid signs of economic recovery, handing disappointment to investors who have worried about tightening liquidity and rising bond yields.

Since early May, the People's Bank of China (PBOC) has tolerated a steady increase in money market rates and the highest 10-year sovereign bond yield in five months.

And although a fresh liquidity injection was signalled by the government two weeks ago, governor Yi Gang is taking an unusually long time to deliver.

Instead, he has told markets to start thinking about an "exit" from the looser financial policies implemented earlier this year, even as the country faces a highly uncertain path out of the historic economic slump in the first quarter.

For now, he is backed by the data - a manufacturing survey released this week points to continued improvement in both demand and supply in June.

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Monetary policy is still easing in a broad sense, but there has been some "partial tightening" compared with the stance in February and March, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered in Hong Kong. "The central bank supports economic recovery with eyes on faster credit growth and lower borrowing costs, but it is not to make everyone in the market happy."

With China's finance ministry taking the lead in economic policy support this year by issuing a record amount of special-purpose bonds, the central bank is pursuing a far more restrained strategy than global peers.

Though intensifying disputes with the United States and the risks of a second wave of infection may be prompting officials to save stimulus for worse scenarios ahead, Mr Yi is also warning of the risks of prolonged monetary easing.

"We believe that the financial support policies in response to Covid-19 are phased policies," he said in a speech in Shanghai on June 18. "We should pay attention to the 'after effects' of the policies, keep the aggregates at appropriate levels, and consider in advance the reasonable timing of exit for policy tools."

Monetary policy is returning to the "pre-Covid approach" of easing that features targeted stimulus, said Liu Peiqian, China economist at Natwest Markets in Singapore. "While ensuring job stability still needs relatively fast credit growth, the loosest moment in monetary policy is behind us, owing in large part to the improving economic fundamentals."

Indeed, the economy is on track to post a small expansion this quarter, after a slump of 6.8 per cent in the first three months.

Growth in industrial output and fixed-asset investment are expected to reach a pace similar to the pre-virus level in the second half of the year, showed a recent Bloomberg survey, while retail sales and exports are still contracting.

In its latest move, the PBOC cut the cost of a lending programme to lower borrowing costs for small businesses from Wednesday, signalling a continuation in the targeted easing approach.

The State Council pledged to use some of the proceeds from local government debt to buy convertible bonds sold by small banks, in a bid to help them replenish capital and lend more to small businesses.

The next step in reserve-ratio cuts had been expected in June after the State Council, China's Cabinet, signalled such a move. Normally, the central bank, which is not independent, will act within days to implement the government's wish. BLOOMBERG