Is The PBoC Embarking On A New Tightening Cycle?

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Rising Property Prices A Challenge For Monetary Policy

Rising property prices in China have increasingly become a challenge for monetary policy. The PBoC’s Q4 2016 Monetary Policy Implementation Report released last Friday, showed that “curbing asset bubbles” has now been added to the traditional tasks of China’s monetary policy such as stabilising economic growth, facilitating the adjustment of the economic structure and controlling financial risks. The report stated that, to address the relationship between asset bubbles, monetary policy, and macroprudential framework, that “the macroprudential framework alone, might not be able to curb asset bubbles.”

Monetary Policy Needs To Curb Asset Bubbles

The report also stated that there is a “need to utilize the twin pillars of monetary policy and macroprudential policy to curb asset price bubbles.” Specifically, the report highlighted the property bubble, pledging to control aggregate money and stem credit from moving into real estate speculation while still supporting reasonable housing demand.

The increase in money market rates, fuelled by the PBoC’s OMO rate hike on February 23rd, reflects the shift to a mild tightening stance in an effort to curb the property bubble and reduce financial risks. The hike was equivalent to a 10bp hike under the new policy regime, which is targeted more at the money market and OMOs.

Alongside attempting to curb the property bubble, this move could also help stem RMB depreciation expectations and therefore stabilise exchange rates which might be viewed as a show of friendship to the Trump administration in an effort to avoid a trade war.

Rising PPI No Concern To PBoC

Currently, rising PPI doesn’t appear to be a key concern for the PBoC. The report aligns the rise in PPI to demand factors such as real estate investment and infrastructure building as well as supply factors such as capacity reduction and inventory destocking.  The report also portrays rising PPI as a positive factor for economic growth and highlights that recent PPI increases have been influenced by upstream industries and therefore reflect imbalances in the industrial structure.

In the short term, further OMO hikes are unlikely, mainly because economic growth continues to face challenges. The property market is calming down as sale are being restricted by policies ranging from higher down payment ratios to a tighter home purchase quota. Furthermore, although aggregate financing picked up to a record high in January, FAI growth might only be stable rather than rebounding.

When the Chinese property market was about to enter a downcycle in 2014, the market was still being carried by the ebullient property market of 2013. This time, however, the market seems to have learned from past mistakes and many investors are now expecting a new down cycle in 2017.

Monetary Policy Outlook

In terms of gauging the likely monetary policy approach of the PBoC over 2017, it is best not to focus purely on the PBoC who, as a central bank, tend to be reactive. Instead, the outlook is the best approach by establishing a view of the economy. As discussed, despite many analysts pointing to slightly higher growth over Q1 as inflation edges up, headwinds from elements such as the cooling property market are likely to turn growth lower again into 2Q. With this in mind, monetary policy is likely to remain neutral and potentially even shift back towards pro-growth in 2H17 with a return to easing.

Furthermore, the lingering uncertainty linked to the new Trump administration poses risks to the Chinese economy with the potential still for heavy tariffs to be applied to Chinese exports to the US. Considering this later point, again the PBoC is likely to remain neutral as they await further information and so the recent OMO move is unlikely to mark the start of a new tightening cycle.

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