Some mainstream press articles have recently highlighted shifts in China’s economic policy. These include a loosening in lending limits and a slower pace of appreciation for the Renminbi. In a very insightful interview with Qiushi, a Chinese Communist Party Journal, Liu Ming-Kang, the chairman of the China Banking Regulatory Commission, outlines some of the context behind China’s recent economic policy moves.
Two points are especially worth our attention. First, Mr. Liu indicated that a distinction must be made between overall liquidity in China and liquidity in the banking system. He indicates that overall liquidity is ample, due in part to the ongoing build-up of foreign exchange reserves from exports and incoming investment, but that banking liquidity at small and medium-sized banks is tight. China’s looser monetary policy is aimed at loosening liquidity at these institutions as small and medium-sized businesses and the agricultural industry have been growth constrained due to more limited access to credit. Mr. Liu’s outline of China’s policy goals really highlights the fact that there are nuances to China’s economic policy that might easily be missed with mainstream press reporting.
The second important point in the interview with Mr. Liu is the fact that, with the Renminbi having steadily appreciated since 2005, expectations of continued appreciation have been built-in and inflows of speculative money, counting on further appreciation, have made control of China’s monetary policy more difficult. As a result, slowing the pace of Renminbi appreciation may be one way to slow hot money inflows. If China can successfully break expectations that the Renminbi will always rise, then China’s domestic inflation may be easier to control. How this is achieved and what this means for ongoing exchange rate policy for China remains to be seen. At a minimum, counting on ongoing Renminbi appreciation is no longer a guaranteed bet. One must include some probability in any analysis that further appreciation doesn’t occur, although the likelihood of further appreciation is still likely higher than depreciation.