Policy debate on China’s monetary policy rages as economy faces strong headwinds

China will require an active and dynamic support system for its fiscal and regulatory policies so that it can mitigate the challenges posed by the deepening trade war with the United States.

A slowdown in China’s economy due to its ongoing trade war with the United States has sparked a debate on its fiscal and monetary policy, with the People’s Bank of China (PBOC) run Financial News reporting that analysts are calling for an a change of course in the country’s financial regulations and fiscal policy. The article underscores the fact that China’s monetary policy alone would not be able to mitigate challenges in corporate funding.

The article cites Ming Ming, an analyst from CITIC Securities as saying in order for China to maximize the effectiveness of its monetary policy, it requires an active and dynamic support and coordination with fiscal and regulatory policies.

“There is still a lot of room for fiscal policy” support, and policymakers should focus on the “strength and rhythm” of regulations, “fully considering the impact on market expectations”, said Ming.

Faced with a slowdown of its economy, government researchers are debating whether fiscal policy should help to soften the impact of a trade war with the United States. With regulators cracking down on off-balance sheet lending fearing financial risks in 2018, the overall credit growth in the country has slowed down significantly. Friday’s article with updated data shows that lending through regulator banking channels were not making up for this gap in credit.

Despite the fact that Chinese authorities tried to balance the credit gap in the crackdown on riskier lending by a massive stimulus program, the economy is showing signs of strain from multi-year crackdowns. Corporate borrowing costs have shot up, as a result, the PBOC has had to cut the banks’ reserve requirement ratios (RRR) 3times in 2018.

“If nothing else, the recent debate suggests that officials agree on the need for policy loosening, even if they disagree about the exact form that it should take,” wrote Julian Evans-Pritchard, a senior economist at Capital Economics in a note. “This highlights how far policy priorities have shifted since the start of the year, when the deleveraging campaign was still at the top of the political agenda.”

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