People’s Bank of China must find a way to align monetary policy priorities with Xi’s ever-expanding regulatory objectives
https://asiatimes.com-by William Pesek
Chinese leader Xi Jinping still has big tech regulation in his sights in 2022. Image: Facebook
On January 16, People’s Bank of China (PBOC) Governor Yi Gang voiced optimism that Asia’s biggest economy can return to business as usual in 2022. Yet two days later, his boss – Xi Jinping – reminded Yi how hard that might be.
Last Friday, President Xi signaled that the brutal US$1.5 trillion sell-off in tech stocks his industry crackdowns triggered isn’t over. Xi’s regulators spooked investors with new guidelines for food-delivery platforms, including industry giant Meituan, to cut fees they charge restaurants.
The sudden plunge in Hong Kong’s Hang Seng Tech Index, which tracks China’s top tech companies, reflected fears that Xi may have more broadsides up his sleeve and that they might be fired on markets between now and later this year, when Xi plans to secure a third term as Communist Party leader.
The strong response shows that “market fears over China’s regulatory tightening haven’t been fully eradicated,” notes strategist Daniel So at CMB Worldwide Securities. Generally, he adds, markets had been proceeding as if the “worst of crackdowns must be over.”
Not so much, as Xi’s team reverts to micromanaging-tech mode. This uncertainty is sure to make for a very busy year for Yi’s team at the PBOC, perhaps more than he knows.
“We will keep our accommodative monetary policy flexible and appropriate and increase support for key areas and weak links in the economy,” Yi told central bank chiefs and finance ministers from the Group of 20 nations last Wednesday.
Yi noted that turbulence in the global economy will probably require more counter-cyclical adjustments to China’s money supply. In the second half of 2021, the PBOC pivoted to easing mode as Covid-19 hit economic growth and Xi’s policies to reduce leverage in the property sector unnerved credit markets.
In the October-December period, the Yi team moved forcefully to slash interest rates, cut the amount of cash banks must put in reserve and added liquidity to credit markets. The PBOC did so again in January.
As the year begins, PBOC staff reckon China can expand in the 5% to 5.7% range. This “potential growth rate” is the same one the central bank projects into 2025. Achieving it requires the PBOC to align monetary policy priorities with Xi’s regulatory objectives for gross domestic product (GDP) in the short-to-intermediate term.
Yet with Xi’s tech crackdown shifting into new gears, the months ahead could require far more assertive PBOC support. The good news is that Yi’s team has the latitude to ease.
Though the US Federal Reserve, European Central Bank and Bank of Japan are all at zero, the PBOC’s one-year loan prime rate is 3.7%, while its five-year LPR, the reference for mortgages, is 4.6.%.
It helps, too, that both China’s factory-gate inflation and consumer price growth cooled in January. The producer price index rose 9.1% from a year ago, below the 10.3% gain in December. “Inflation concerns are unlikely to hold back the PBOC from more policy loosening measures,” says Sheana Yue at Capital Economics.
Earlier this month, Premier Li Keqiang said as much. “We are confident and capable of tackling inflation, but we must stay on alert,” Li noted. “Should inflation occur, it would cause a major impact on society. Therefore, it is crucial to ensure supply and keep prices stable.”
Economist Ho Woei Chen at UOB Group says the PBOC is “likely to ease monetary policy further to support growth. Ding Shuang at Standard Chartered Bank thinks the most likely window for major easing is April, after the first-quarter GDP data are released.
Yet a move before then is quite possible.
Economist Iris Pang at ING Bank notes that many believe the “central bank still needs time to see the impact of last month’s cuts to gauge the timing of further cuts.”
The bottom line, she says, is that “further easing of monetary policy is important as there are more bond defaults coming, and we expect that the PBOC really needs to act proactively to alleviate extra downward pressure on GDP growth.”
One problem is the mixed signals coming out of Beijing. In recent weeks, economist Lauren Gloudeman at Eurasia Group wasn’t alone in finding great meaning in a People’s Daily commentary on “correctly understanding and grasping the characteristics and behavioral laws of capital.”
It expounded on Beijing’s apparent campaign to counter the idea that Xi’s government is, as Gloudeman puts it, “hostile toward private investment and in particular the e-commerce sector.”
The commentary argued that Xi’s crackdowns “aren’t about not wanting capital, but wanting it to develop in an orderly way.”
Importantly, it hinted that “initial promising results” from regulatory actions meant China could avoid sweeping new moves. The hope was that e-commerce giants like Alibaba and Meituan could breathe easier. Not so much, though.
The risk now is that the PBOC might need to resort to bigger easing moves. In recent months, stock markets in Shanghai, Shenzhen and Hong Kong rallied in response to liquidity boosts. Investors assume an upswing in mainland growth would flow through to higher corporate profits in short order.
Xi needs to tread carefully
Reactions have been especially acute in shares of default-plagued property developers like China Evergrande Group, Kaisa Holdings and Sunac China. Yet as time goes on and default risks increase, the PBOC might need to cut borrowing costs in bigger amounts to trigger the intended market reaction.
Xi, however, needs to tread carefully. Just as the PBOC is keeping its eye on potential growth heading toward 2025, Xi’s reformers are supposed to be building economic muscle to morph China into an innovative powerhouse by then.
Willing the “Made in China 2025” initiative into existence requires smart regulation. But it also requires predictable regulation and leadership.
That has not been forthcoming. Indeed, Xi’s clampdown on Alibaba founder Jack Ma has damaged China’s street cred as a capitalist economy over the past 15 months.
In late November, Beijing increased the powers of the State Administration for Market Regulation’s antitrust unit. This upgrade in bureaucratic circles increased its latitude and resources to probe industry.
In December, Reuters reported that China’s online brokerages may be banned from providing offshore trading services to mainland clients. The rationale is both familiar and vague: concerns over data security and capital outflows.
The bottom line is that even the most bullish of investors “have been forced to consider a series of new regulatory risks over the last year, and those fears are not going to disappear any time soon,” says Logan Wright, head of China research at Rhodium Group.
All this “broadens the range of potential regulatory concerns.”
And it broadens the range of ways the PBOC might be forced to open the monetary floodgates in the months ahead, with all the related implications for the yuan and mainland credit markets.
Follow William Pesek on Twitter: @WilliamPesek