23-FEB-2008: PBC Monetary Policy Report 2008/Q4 published

The Chinese version of the monetary policy report for the last quarter 2008 is published and the English version is expected soon. Q4 reports are of particular interest as they usually give the monetary outlook for the next year with the publication of the monetary targets to be achieved: Target growth of monetary aggregates; target increase of domestic loans; and target inflation rate.

The 2008/Q4 report differs from earlier reports as the traditional outlook for the coming year is smaller than in previous years. This undoubtedly reflects the higher-than-before uncertainty over the economic and monetary developments for 2009.  And the earlier practice of publishing the monetary targets for the next year was also again discontinued. The only target mentioned is that monetary aggregate M2 is forecasted to rise by around 17 per cent. For inflation, no target is published, but the risk for deflationary tendencies is highlighted.

The fact that no other targets are published may be interpreted as the PBC’s wish to gain a more flexible macro-control mechanism. This certainly is a valid point in the current  unpredictable and unstable economic environment. But had the PBC given a bit more of a concrete outlook for some of the monetary key data it could have signalled more confidence and thereby potentially promoted stability in itself. All eyes are now on the  soon-to-be-published 2008 annual monetary policy report or the 2009/Q1 report. These are two other possible places for publishing monetary targets for 2009.

08/10-DEC-2008: Monetary Targets to be set for 2009 in the Annual Central Economic Working Conference

The definition of monetary policy targets in China, i.e. the target growth of monetary aggregates, the target increase of domestic loans, and the target inflation rate is usually the result of the discussions carried out in the Annual Central Economic Working Conference.

The Central Economic Working Conference for 2009 is convened from 08 to 10 December 2008. The main concern of the conference will undoubtedly be on questions related to fiscal and monetary policy and their roles in 2009 to ensure appropriate economic growth amidst the global financial crisis.

The set monetary related targets for a certain year are then usually announced in the Q4 (of the current year) PBC monetary policy reports. For 2008, however, no targets for monetary aggregates, domestic loans, and the inflation rate were published following the conference. While later in the year an inflation target was announced, this target was not derived from an economic assessment process.

The Q4/2008 PBC monetary policy report is due around February 2009. What seems conceivable now is that monetary policy in 2009 should be “moderately active“.

PBC governors’ meeting to discuss monetary policy support to the fiscal package in China

The PBC informed of a Governors’ Meeting to clarify on the monetary policy role and principles in supporting the fiscal stimulus package agreed on during the last weeks. The meeting agreed on five guiding principles for the PBC:

First, need to ensure adequate liquidity in the financial system. Second, keep appropriate growth of money and credit, and support bank lending to facilitate economic growth. Third, utilizing actively the tool of window guidance with focus on “financial reform, innovations, credit support to key projects, small- and medium-sized enterprises, agriculture, rural areas and rural residents, post-disaster reconstruction, education and job creation, technological upgrading, M&A, the shift of over-capacity industries to overseas markets, energy conservation and pollution reduction, circular economy”. Fourth, promote corporate bonds for corporate financing. Fifth, improve the financial services provided by the PBC such as analyzes and forecasting as well as payment and settlement processes.

14-MAY-2008: PBC Monetary Policy Report 2008/Q1 published

The monetary policy report for the first quarter 2008 is published, for the time being in Chinese only. In the past, Q1 reports sometimes gave updates on the monetary outlook for the year and served as an instrument to publish the yearly monetary targets of target growth of monetary aggregates; target increase of domestic loans; and target inflation rate. This time, as expected, no reference was made vis-a-vis the exact scope of monetary policy targets in 2008.

The report focuses on analyzing the current inflationary environment and measures taken to tightening monetary policy in the first months of 2008, including minimum reserve adjustments and currency appreciation of more than four per cent. At the end of the 2008/Q1 report there is a dedicated section to this year’s outlook with the title “货币政策趋势” (Monetary Policy Trends). The section covers very broad issues around the overarching theme of monetary tightening without setting-out clear targets on how to achieve it. Measures to be undertaken in the subsequent periods are (among others):

继续加强流动性管理，引导货币信贷合理投放 (Continue to strengthen liquidity management, guide reasonable credit growth in the market);

合理运用价格型工具 (Rational application of market-based instruments);

加强窗口指导和信贷政策指引 (Strengthen window guidance and credit policy);

采取综合措施，促进国际收支平衡 (Adopt comprehensive measures, promote a stable balance of payments); and

积极发展直接融资 (Vigorously develop direct financing).

The English version of the report is expected soon. I’ll keep you posted.

05-MAR-2008: China sets 4.8 per cent inflation target for 2008

The Chinese Premier Wen Jiabao addressed the First Session of the 11th National People’s Congress (NPC) in Beijing on Wednesday, 05 March. In his speech he said that curbing fast-rising inflation and preventing economic overheating were the country’s top fiscal priorities for 2008, since “the current price hikes and increasing inflationary pressures are the biggest concern of the people”. Chinese media used his remarks to announce that the Chinese inflation target for 2008 was set to 4.8 per cent, which in fact is just a projection of last year’s inflation rate.

Is this the publication of the monetary policy targets we were waiting for so long? Probably not! This is primarily a political target and not a monetary policy target published and pursued by the authority in charge of monetary policy, the central bank. Instead Wen Jiabao mentions measures to be taken on all levels of government, such as instituting contingency plans for market supply and price, putting on hold the price surge in production materials, especially those for agricultural production, and subsidizing residents in the lower income bracket. This does not sound as a likely departure of (temporary) price controls any time soon (please see blog posting below).

22-FEB-2008: PBC Monetary Policy Report 2007/Q4 published

The long-awaited monetary policy report for the last quarter 2007 is published, for the time being in Chinese only. The English version is expected soon. Q4 reports are of particular interest as they usually give the monetary outlook for the next year with the publication of the monetary targets to be achieved: Target growth of monetary aggregates; target increase of domestic loans; and target inflation rate. These are the result of consultations within the government circles as well as the discussions around the Annual Central Economic Working Conference, usually convened in December of the preceding year.

The 2007/Q4 report is no exception and has a dedicated section to this year’s outlook with the title “2008年货币政策取向” (2008 Monetary Policy Orientation) covering similar issues as Q4 reports of previous years:

1. 综合运用对冲措施，继续加强流动性管理 (Improve and strengthen liquidity management);
   
2. 合理运用价格型工具实施调控 (Further implementation of market-based instruments);
   
3. 完善有管理的浮动汇率制度 (Further improve the RMB exchange rate regime);
   
4. 继续加强对金融机构的窗口指导和信贷政策指引 (Continue to improve window guidance and credit policy vis-a-vis the financial system);
   
5. 大力培育和发展金融市场 (Vigorously foster and develop the financial market);
   
6. 深化金融企业改革 (Deepen reforms of the financial industry); and
   
7. 进一步改进外汇管理 (Further improve the foreign exchange management).

But there is a main difference to prior reports, i.e. the lacking of the awaited announcement of 2008 monetary targets as it was the usual procedure in 2004, 2005 and 2006. The fact that no targets are published may be interpreted as the PBC’s wish to gain a more flexible macro-control mechanism and to be able react to unexpected developments as they arrive. Such or similar were the explanations of the decision to not publish any target values any more for the increase of domestic loans in 2007 (China.org.cn).

This time, however, it seems for 2008 no monetary targets at all would be published. In my view, this would be dangerous as it could show that the central bank currently is not confident enough to reach given monetary targets; as a result the public may increase inflation expectations at large given the perceived powerlessness of the central bank. Naturally, it would equally be wrong to publish monetary targets that would be missed by a large margin in 2008. It is therefore important that the PBC not only sets targets for 2008 to show that the bank is confident to reign the current inflationary threat, but also that these targets are appropriate, i.e. reachable, to make clear (ex post) that the bank actually has control. Admittedly, the publication of targets may come in the 2007 annual monetary policy report or the 2008/Q1 report, which are to be published soon, too. So far, the most concrete target for monetary growth from the central bank comes from Yi Gang, vice governor of the People’s Bank of China, when he addressed a financial forum with an estimated M2 growth of 16 per cent in 2008. I’ll keep you posted.

03/05-DEC-2007: Monetary Targets set in Annual Central Economic Working Conference

The set-up of the monetary targets of the PBC (target growth of monetary aggregates, target increase of domestic loans, and target inflation rate) is the result of consultations within the government circles as well as the discussions around the Annual Central Economic Working Conference. For 2008, the Central Economic Working Conference was convened from 03 December to 05 December 2007. The monetary related targets for a certain year are usually published – among others – in the Q4 (of the current year) PBC monetary policy reports, mostly published in February (of the next year).

For 2007 the setting-up of monetary targets revealed one major change vis-a-vis earlier years: That year the PBC did not publish target rates neither for monetary aggregate M1 nor for the rate of increase of domestic loans. This was widely attributed to the PBC’s wish to gain a more flexible macro-control mechanism (China.org.cn). Whether this practice was continued for 2008 is not yet clear as the Q4 2007 monetary policy report is not yet published. What is known by now, however, is that overall the monetary policy in 2008 will be “tight”; this is the first time since 1997 that the central government explicitly mentions the word “tighten” to describe the approach to monetary policy.