China’s monetary belt-tightening…or not? | FT Alphaville

China’s monetary belt-tightening…or not?

In a country where official speeches tend to be overtly formal, Wen Jiabao’s economy-themed equivalent of a US State of the Union speech might at least have given us half a clue as to policy intentions in Beijing.

Fat chance. The Chinese premier did little to assuage concerns about Beijing’s apparent determination to reign in bank lending and cool the economy.

In his annual speech to the National People’s Congress in Beijing, Wen promised “moderately easy” monetary policy.

As Reuters reported:

“We need to continue to implement a proactive fiscal policy and moderately easy monetary policy,” Wen said in his government’s work report delivered at the annual session of the the National People’s Congress, China’s parliament, on Friday.

But what does the People’s Bank of China, the central bank, have to say about this promise? Reuters continues:

Deputy governor of the People’s Bank of China Su Ning said the government would adjust its monetary policy to meet a targeted 3 percent rise this year in the consumer price index, which traders said appeared to be aimed at curbing inflationary expectations.

Su added that the PBOC needed some time to determine whether to actually raise interest rates.

But China-watchers still think rates there are going up. Here’s a snap sent to North Square Blue Oak clients earlier:

It may be difficult to maintain the 3% CPI growth target due to the low base effect, which may push PBOC to raise interest rates earlier that expected. In 2010, the complete withdrawal of stimulus will depend on whether economic growth can successfully rebalance from policy support to private investment and consumption.

It’s unclear which direction the bank will take in the near future — “moderately easy” monetary policy, or faster tightening.

In January, China’s central bank called a screeching halt to frenetic lending activity, a move which triggered falls in global markets. Regulators also required banks to hold 16 per cent of deposits in the central bank, up from 15.5 per cent.

Then again, in February, just before Chinese New Year, the PBOC announced another curb to bank lending. This time the reserve requirement for banks was lifted to 16.5 per cent.

But it can be argued that this is not actually tighter policy. As the FT reported last month:

Stephen Green, economist at Standard Chartered in Shanghai, said: “This is technical liquidity management and not tightening.” He said the authorities were likely to announce a similar move every month for the foreseeable future.

On Friday investors in Hong Kong and Shanghai seemed unsure as to whether they should be pushing stock price up or down. But if they had logged in to an internet chat session held by Wen earlier in the week, they would surely have known what to expect. From the WSJ.

“Currently we are still carrying out a moderately loose monetary policy. That is to say ‘moderately loose’ is on the one hand ensuring stable and relatively fast economic development, and on the other hand being able to manage inflation expectations,” Mr. Wen said, adding that managing inflation expectations is a “major task” this year.

Stable, fast, major, loose…

Perhaps Wen should listen to Liu Mingkang, his chief banking regulator at the PBOC. Again,  from the Journal:

We need to improve policy statements and information disclosure, and release the necessary policy signals in a timely manner to guide the public to form a realistic judgment,” Mr. Liu said.

That, Mr Liu, would be helpful.

Related links:
China to target 8% economic growth
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China’s money supply
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Good numbers?or bad numbers?
– China Financial Markets