'Interest Rate Cut?' People's Bank of China Removes 'Curb Money Supply' from Monetary Report (Comprehensive)

Exclusion of the phrase 'Daesuman-gwan Jaje' after 8 quarters since Q2 2018

[Image source=Reuters Yonhap News]

[Asia Economy Beijing=Special Correspondent Park Sun-mi] The People's Bank of China, the central bank of China, removed the phrase "will refrain from expanding liquidity" from its monetary policy implementation report for the first time in eight quarters. This is interpreted as a shift to a more accommodative monetary policy stance to revive the economy hit by the spread of the novel coronavirus disease (COVID-19). Accordingly, the possibility of additional monetary easing through interest rate cuts is gaining weight.

In the '2020 Q1 Monetary Policy Implementation Report' released on the 10th, the People's Bank of China deleted the expression "will not engage in da shui man guan (大水漫灌, literally 'flood irrigation')" from the report. This phrase had not been omitted from the monetary policy implementation report since Q2 2018, marking eight quarters. Da shui man guan refers to the massive injection of liquidity as if pouring water in large quantities to stimulate the economy, and removing the phrase "will refrain" can be seen as an intention to increase liquidity.

Instead, the People's Bank of China included phrases such as "In Q1, COVID-19 suddenly dealt an unprecedented shock to China's economic and social development," and "The Chinese government prioritizes COVID-19 control as the most important task while ensuring liquidity is reasonable and abundant and increasing credit support." It further emphasized, "Although the long-term positive trend of the Chinese economy remains unchanged, given the increased uncertainty in the global economy, support will be provided to make the recovery of the real economy more prominent."

Until now, the People's Bank of China has emphasized a policy of supplying liquidity in a targeted manner to necessary sectors through the phrase "will not engage in da shui man guan." This meant that it would not pursue large-scale monetary supply or quantitative easing like Western countries. Premier Li Keqiang of the State Council of China also repeatedly stressed in speeches last year that "comprehensive economic stimulus through da shui man guan will be avoided."

Economic experts evaluated the disappearance of the phrase "will not engage in da shui man guan" from the People's Bank of China's Q1 monetary policy implementation report as a signal of a more aggressive monetary policy easing. On the 11th, China's state-run Global Times cited experts who analyzed this as a sign that the People's Bank of China could take bolder steps in monetary policy easing through benchmark interest rate cuts and reductions in banks' reserve requirement ratios.

International finance expert Zhao Qingming explained, "Until now, the Chinese government has relied more on fiscal policy than monetary policy to boost economic growth. However, this report implies that preemptive measures may be taken before economic statistics are released for monetary policy decisions." He also predicted that the People's Bank of China would soon further cut the Loan Prime Rate (LPR), saying, "To revive the Chinese economy, which has shown its lowest growth rate since 1997, monetary policy must play a decisive role in supporting the economy."

Mingming, a researcher at Zhongxin Securities, also forecasted through Bloomberg News that "China's monetary policy will expand in a direction that helps the development of the real economy and strengthens product manufacturing, consumption, and domestic demand."

China, which announced a record worst Q1 economic growth rate of -6.8%, has focused on fiscal policy to revive the economy plunged by the COVID-19 impact. In contrast, the LPR, which serves as the benchmark interest rate, has only fallen by 0.3 percentage points to 3.85% through two adjustments this year. This contrasts with the United States, which has cut its benchmark interest rate by 1.5 percentage points in the past two weeks. Moreover, the People's Bank of China's official one-year loan benchmark rate has remained unchanged at 4.35% since October 2015.

Accordingly, there is growing weight on the possibility that the LPR rate, scheduled to be announced this month, will be cut once more and that the bank reserve requirement ratio will also be lowered. On the same day, Chinese economic media Hexun diagnosed in "7 signals from the People's Bank of China's monetary policy report" that "the People's Bank of China's monetary policy stance has become more relaxed," and "it seems that not only the LPR rate but also deposit rates and Medium-term Lending Facility (MLF) rates will be cut in tandem."

The MLF rate, which is linked to the LPR rate, is expected to be cut by an additional 1 percentage point within Q2. BNP Paribas also predicted that the Chinese government will maintain a monetary easing stance for the time being, expecting a 0.5 percentage point cut in the bank reserve requirement ratio and an additional 0.1 percentage point cut in the LPR. Some speculate that the Chinese government will also strengthen fiscal policy and present a fiscal deficit target exceeding 3% of GDP through the upcoming National People's Congress and Chinese People's Political Consultative Conference at the end of this month.

This content was produced with the assistance of AI translation services.