Fan Jianjun, DRC

2017-2-13

China’s economy showed the initial momentum to turn around in 2016. Statistics indicate that China’s economic growth rose significantly, showing a positive performance. The major force contributing to the continuing economic recovery recently came from the demand side of the economy, bolstering the strong rebound of “cash plus demand deposits”.

The nominal aggregate demand featured by the growth of “cash plus demand deposits” surged prior to declining. The reasons are as follows. 1. The intensity of government budgetary support seemed to be weakened since the second half of 2016. 2. The monetary policy of the Central Bank became tightened since the second half of 2016. 3. Due to the fact that the Central Bank reduced the amount of money in circulation, the issuing amount and custody volume of corporate credit bonds decreased by a big margin . 4. In face of the depreciation pressure of RMB, the Central Bank sold foreign exchange in a large amount in order to stabilize the exchange rate, leading to a sharp decline in funds outstanding for foreign exchange. 5. The management departments enforced policy measures related to personal housing mortgage loans, real estate development loans, and real estate bond financing since the second half of 2016.

In 2017, the management departments need to transfer the policy focus from stabilizing growth onto a moderate monetary policy by easing the monetary policy rather than tightening it up.

The Central Bank needs to give priority to using tools to lower the required reserve ratio instead of implementing quasi re-lending tools like medium-term lending facility (MLF) and pledged supplementary lending (PSL). The reasons are as follows. 1. It’s hard to reach the anticipated goal of structural adjustment and control by applying policy tools like MLF and PSL. 2. Lowering the required reserve ratio is more beneficiary for lowering business banks’ cost of capital. 3. Rent-seeking behaviors targeting the prescribed quota of MLF and PSL are likely to be induced.

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