We’re used to seeing both dovish and hawkish displays at any one time from monetary policy committee members in the west.
But it’s always been much rarer to see conflicting views from high-ranking members of the People’s Bank of China.
A chasm, though, may be emerging. Albeit between PBoC officials and PBoC advisors.
BNP Paribas’ FX strategists point to the conflicting position in their Wednesday note:
PBOC advisor Li Daokui said said a rate increase in the first quarter would be reasonable because inflation tends to be elevated for seasonal reasons during the opening months of the year. Li said the government does want to rein in bank lending, but that setting a full-year credit quota by itself was insufficient.
However, separately, PBOC Vice governor Yi Gang cautioned against raising rates too steeply for fear of luring in hot money. He said that China should focus on tackling the root cause of inflation by cutting the trade surplus rather than relying too much on monetary policy to fight inflation.
So while advisors like Li Daokui want more interest rate rises, PBoC officials seem to be focusing on alternative measures like tackling the country’s trade surplus.
At issue on both fronts are the singularities of the Chinese market. China, after all, has one of the highest savings ratios among major economies in the world and most of these savers are now suffering from negative real returns due to inflation.
Hiking interest rates should, on the surface of it, thus encourage deposits. But, at the same time, it could put banks at risk of sudden large withdrawals, while slowing the development of China’s capital markets. What’s more it could also encourage consumer spending by making Chinese depositors feel wealthier.
Tackling the root of the problem though ( i.e. the trade surplus) responsible for creating all those savings in the first place — may consequently be a much wiser step to take.
It would also likely appeal to China’s trade partners.