Domestic loans (RMB) increase by 21.33 per cent in China at end-January 2009

China’s monthly domestic loan increases in January 2009 jumped by impressive 2.57 percentage points. and increased 21.33 per cent over January 2008. This is good news as bank loans around the world are virtually halted and authorities are desperately trying to get the credit markets going again. Similarly to the causes behind the increase in monetary aggregate M2, the jump in domestic loans comes as a consequence of the fiscal and monetary package adopted in early November.

But much more, the jump also indicates that the monetary instrument of “window guidance” (cf. Instruments of Monetary Policy in China) is still heavily and effectively used in the Chinese context. The policy of “window guidance” uses benevolent compulsion to persuade banks and other financial institutions to stick to official guidelines. Central banks put moral pressure on financial players to make them operate consistently with national needs. Through this, the PBC uses its quantity-based direct monetary policy approach to  support the fiscal package announced in November 2008.

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.

15-AUG-2008: PBC Monetary Policy Report 2008/Q2 published

The monetary policy report for the second quarter 2008 was published on 15 August in English. It features the usual statistics of financial and monetary performance with an analysis of the conduct of monetary policy. Additionally, this time the report is written at the background of various monetary disaster relief actions in the aftermath of the May earthquake.

I expected the report to shed some light on the actual usage of window guidance in the current inflation fighting efforts of the PBC. For some reason none of the recent notifications of the PBC did focus on the usage of this so important instrument of the central bank. This is surprising, particularly since the authorities gave a rather good account of the utilization of window guidance in the 2003/04 expansionary cycle. It is unclear why the PBC seems so reluctant this time to give some details on the implementation practice.

For sure, the instrument still plays a major role in the monetary set-up. The recent report confirms that and states: “In line with the principle of differentiated treatments of different sectors, the PBC guided commercial banks in optimizing the credit structure, strictly limiting lending to low-quality enterprises in industries with high energy consumption, heavy pollution, or overcapacity, strengthening credit support to the rural economy, earthquake disaster relief, small and medium-sized enterprises, the services sector, self-initiated innovation, energy conservation and environmental protection, and improving financial services in the rural areas.” Just how it is done this year is somewhat a black box at the moment.

“Serious short-term inflationary threat” calls for further tightening in China

After the publication of the latest inflation figures for January today (7.1 per cent) economists speculate of the extend of further tightening measures by the Chinese authorities. British newspaper “Telegraph” quotes Stephen Green from Standard Chartered Bank “that the [Chinese] economy faces a serious short-term inflationary threat”. His assessment makes him expect four rate hikes in 2008. American MarketWatch identified signs that as response to the rate-hike expectations the value of the USD went down immediately today (19-Feb-08). China’s Shanghai Daily refers to Ma Jun of Deutsche Bank who thinks two interest rate hikes within the next three months seem to be possible.

The same article quotes others, who think that scope for interest rate increases has diminished with the snow storms as the “interest-rate (…) is a weapon to fight inflation which will cast an impact on all industries”; this would not be the right prescription now as some sectors need particular support to weather the snowstorms. Instead of moving the benchmark interest rate, Li Maoyu of Changjiang Securities Company, argues that adjustments of the reserve-requirement ratio for banks and price controls were more likely.

Morgan Stanley’s Wang Qing, chief China economist, in an interview with Bloomberg, expects no re-action of the authorities to the January price hike as the short-term nature of the “supply shock” to food items induced by the snow storms early in the year does not call for immediate policy action.

I believe rate hikes indeed will be less pronounced in the next months as widely thought, given the danger of increasing capital inflows that would further add appreciation pressures for the RMB at a time when authorities already quickened RMB appreciation. Still, I expect drastic tightening measures, but mainly through the instrument of window guidance, a quantity-based direct instrument of the PBC. Since information on the scope of window guidance measures is scarce, one way to gauge whether window guidance is being intensified is the number of window guidance meetings that will actually be held in 2008 (2003: 3x; 2004: 1x; 2005: 1x; 2006: 6x; 2007: 2x). We will have to have a close eye on this.