20180605-NATIXIS-The_challenges_of_monetary_policy_in_China_7页_765kb

Flash Economics - Summary

Core Content

This document outlines the key challenges facing the People's Bank of China (PBoC) in its monetary policy strategy, particularly under the leadership of Governor Yi Gang. It focuses on three major areas: preventing financial instability without curbing growth, developing domestic financial markets to support the internationalisation of the renminbi (RMB), and improving the efficiency of savings usage.

Main Challenges

1. Preventing Financial Instability Without Curbing Growth

• Credit Growth Control: The PBoC aims to limit excessive credit expansion to prevent financial imbalances.
• Asset Price Bubbles: Real estate prices are a concern, especially in major cities.
• Shadow Banking: The growth of shadow banking systems (trusts, wealth management units) is being monitored closely.
• Interest Rate Management: The central bank wants to increase short-term rates to manage liquidity but must avoid raising long-term rates that could harm economic growth.

Tools Used: Macroprudential policies, such as required reserves for banks and borrowing limits, are being actively applied to address these challenges.

2. Developing Domestic Financial Markets

• Underdeveloped Markets: Chinese financial markets are not well-developed and lack liquidity, which hinders the internationalisation of the RMB.
• Capital Outflows: Without capital controls, Chinese savers tend to hold their money in bank deposits due to limited investment options, leading to significant capital outflows when controls are relaxed.
• Conditions for RMB Internationalisation:
  • Domestic markets must attract global savings.
  • They must retain Chinese savings even without capital controls.

3. Improving Efficiency of Savings Usage

• High Savings Rate: China has a very high national savings rate.
• Lack of Efficient Investment: These savings are largely invested in money-market assets and real estate, resulting in inefficient investment in construction.
• Need for Reallocation: To improve efficiency, savings must be redirected towards high-growth sectors such as new technologies and growing companies.

Key Information

• Macroprudential Policies: Are central to managing credit and liquidity without stifling growth.
• Capital Controls: Have been in place since 2017, preventing capital outflows and forcing domestic investment.
• Financial Market Development: Is a prerequisite for the RMB to become an international reserve currency.
• Investment Reallocation: Is necessary to ensure the effective use of China's high savings rate.

Conclusion

The PBoC has a clear "road map" for its monetary policy, which includes:

• Preventing financial imbalances through macroprudential tools.
• Developing domestic financial markets to support the internationalisation of the RMB.
• Redirecting savings towards more efficient investment channels.

This strategy aims to balance financial stability, economic growth, and the long-term goal of making the RMB a global reserve currency.

Disclaimer

• The document is intended for professionals and qualified investors only.
• It is confidential and must not be disclosed to third parties without prior consent.
• No personalized investment recommendations are provided.
• No liability is accepted for any use or interpretation of the information.
• Regulatory Compliance: The document is subject to various regulations in different jurisdictions, and distribution is restricted in some regions.
• Author Views: The views expressed are those of the authors and do not necessarily reflect the views of Natixis or its affiliates.