Any taper won't affect China policy, say analysts

2021-08-31 China Daily Editor:Mo Hong'e

Any potential U.S. Fed monetary policy changes would have a limited impact on China's policy, and China may have additional room to ease credit supply as the overall leverage level has declined, analysts said on Monday.

Most analysts that China Daily interviewed said they see Federal Reserve Chair Jerome Powell's latest speech as a "dovish" signal, as he did not provide details on pulling back on the Fed's massive asset purchase plan, or the "tapering" process.

Powell reiterated at the annual Jackson Hole central banking symposium on Friday that Fed will continue the asset purchases at the current pace until the United States sees "substantial further progress "toward its maximum employment and price stability goals.

At the Fed's policy meeting in July, Powell clarified that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year, and he repeated the sentence, which did not surprise the markets.

Powell also highlighted that the timing and pace of the expected reduction in asset purchases "will not be intended to carry a direct signal" regarding the timing of any interest rate hike.

After his speech, analysts said the Fed is likely to maintain a relatively dovish tone in the second half of this year, and it is perhaps almost impossible that the Fed will change its monetary policy in a hurry.

In China, central bank officials stressed in some recent meetings the need to design the "cross-cyclical" monetary policy well, which requires it to maintain a money supply growth rate basically in accordance with the nominal economic growth rate, as well as control financial risks.

As China will decide the monetary policy mainly based on the domestic economic situation, any U.S. Fed moves in the future will likely have "very little restriction" on China's monetary policy, said Li Chao, chief economist with Zheshang Securities.

A guidance on tapering could be released at the Fed's monetary policy meeting in September, but the spillover effects and shocks to the financial market will be limited, Li said.

Macro leverage ratio is one of the key gauges that the People's Bank of China, the central bank, values most, as it can indicate the overall debt level and financial risks. Meanwhile, the cross-cyclical policy will focus on adjusting financing costs and liquidity in the banking system, said Ming Ming, a senior researcher with Citic Securities.

Given the current macro leverage level, which has declined from that in 2020, the central bank may have room to further ease the credit policy in the rest of this year, Ming said.

On Monday, the PBOC injected 50 billion yuan ($7.73 billion) into the banking system through the seven-day reverse repurchase agreement, keeping the interest rate unchanged at 2.2 percent. The move is to stabilize liquidity at the end of August, the central bank said on its website.

A meeting chaired by PBOC Governor Yi Gang last week pledged to maintain a stable monetary policy and make it more forward-looking and efficient.

It urged commercial banks to maintain proper growth of credit supply to support high-quality economic development and aid the recovery of small and medium-sized companies, as well as those in vulnerable sectors, to ensure economic growth is within a reasonable range.

A "dovish taper" could weaken the dollar, said Stephen Chiu, Asia FX and rates strategist of Bloomberg Intelligence, while China's large basic-balance surplus and suppressed overseas tourism could otherwise support strength in the yuan's exchange rate.

In the long term, the possible rise of the yuan's status as a major global reserve currency may help raise the value of the yuan, Chiu said.

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