Current policy package strong enough to counter headwinds, economist says
China has no immediate need of aggressive stimulus to support growth unless trade tensions with the United States more visibly weigh on growth momentum, and greater patience and policy preparation are needed now for market-oriented, longer-term reform and opening-up, a senior economist said in an exclusive interview.
Given the uncertainty from China-US trade friction, macroeconomic policies should always be prepared to support the economy, especially if growth momentum weakens, said Huang Yiping, deputy dean of Peking University’s National School of Development and a former member of the central bank’s monetary policy committee.
"But the adoption of (overly aggressive) macro-polices should be avoided" and there is no need to repeat 2009-type stimulation this time, Huang said last week. "Because it could have negative consequences, including excessive production capacity, inflation and asset bubbles."
Finance ministers and central bank governors from the G20 group gathered in Fukuoka, Japan, over the weekend and discussed possible impacts of escalated China-US trade tensions on economic growth. The International Monetary Fund and the World Bank have recently downgraded their global growth projections for the next two years.
Finance Minister Liu Kun warned at the G20 meeting that protectionism could hurt global growth. "All parties should pay close attention to downside risks and jointly protect the rule-based multilateral mechanism. Trade disputes should be resolved on a basis of fairness and rationality," said Liu, according to a statement on the ministry’s website on Sunday.
China’s economy has generally maintained stable growth this year, and the central government will take a series of significant measures to promote high-quality economic development, Liu said.
Huang said China should be cautious about the impact of the slowing global growth and also hold some measures in reserve.
"If we use up all the ammunition, what are we going to do in a couple of years if the global economy suffers greater downturns, as some expect?" he asked.
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Yi Gang, governor of the People’s Bank of China, the central bank, said on Friday that interest rates and reserve requirement ratios still have "plenty of room" for adjustment, but the monetary policy will remain "prudent" and should be "sober-minded".
A flexible RMB is good for the Chinese and global economy, and the PBOC is not intervening in the foreign exchange rate market, Yi said. "I hope this situation will continue."
The PBOC is going to combine benchmark bank interest rates and the short-term money market rate, said Huang, and the seven-day repo rate may finally be chosen as the policy rate. "The benchmark rates will eventually be removed."
"When that happens depends on whether banks’ lending and deposit rates can efficiently and quickly respond to the changes in the policy rates－that is something we need to work on," he said.
In the first quarter, the central bank urged commercial banks to extend more loans and lower the lending rates for small and private businesses. A more difficult reform is pushing forward market-based interest rate reforms.
In light of the trade tensions, the RMB exchange rate will be more flexible, Huang said. As for the money flowing in and out of China, Huang said he thinks the control should be loosened, "but there are still some areas we are not feeling comfortable leaving the doors wide open".
He recommended that under the normal circumstances, the market could determine the RMB exchange rate, but if extreme situations arise, the central bank can exercise some intervention to prevent spillover effects of exchange rate volatilities on neighboring countries.
Yi, the PBOC governor, said the current fiscal policy package is strong enough to counter headwinds, even if the situation gets a little worse, and "a discussion" could be opened if the scenario turns "tremendously worse".
Looking forward, the unemployment rate, rather than the GDP growth rate, should receive more attention. "The Chinese economy is presently doing reasonably well, and I don’t worry too much about the unemployment problem. So long as people still have jobs, it’s not a concern if growth slows slightly. But this matter deserves to be very closely watched, particularly as now trade tensions escalate rapidly," Huang said.
If trade tensions start to have "bigger impacts" on the economy, he said, and force low-end manufacturers to move out more rapidly, it might increase the pressure on unemployment. So supporting domestic consumption and encouraging the development of the services sector, especially labor-intensive services, could help mitigate the pressure, he said.