The Chinese central bank, People’s Bank of China, issued its first quarter Monetary Policy Report last week, which gives a clear signal of the authorities’ neutral monetary policy stance in the midst of increased worries about regulatory tightening and “balance sheet shrinking”.
It also talks about the use of short- and long- term liquidity injection instruments such as the reserve repo and medium term lending facility. The report strengthens the view than the current ‘financial deleveraging’ is regulatory tightening, and not a macroeconomic-driven policy that aims to tame inflation or economic overheating, noted ANZ in a research report.
The monetary policy report discussed about “central bank balance sheet shrinking” in which it indicated that the “shrinking” of the balance sheet was mainly due to seasonal factors, that is volatility in liquidity conditions during the Luna New Year holiday period and fiscal expenditure in March. The central bank’s balance sheet returned to expansion in April.
The report also suggested that the PBoC will attempt to keep stable liquidity conditions, carrying out a fine balancing act between financial sector deleveraging and financial stability, noted ANZ. Also, the central bank is expected to inject liquidity through additional active MLF operations; however, the use of comprehensive instruments is less likely.
But the PBoC is not expected to deploy widespread monetary policy easing tools in order to avert conveying the wrong signal to the market. Financial bubbles and high property prices continue to be a concern. Therefore, money market tools such as open market operations are more appropriate instruments to execute a flexible monetary policy.
