China’s Monetary Policy Slips a Gear Into Neutral

Unexpected shift in monetary policy is raising questions on strength of China’s rebound

By Nathaniel Taplin

The People’s Bank of China, the country’s central bank, in Beijing./ PHOTO: JASON LEE/REUTERS

China just trimmed the reserve requirement ratio for banks—one of its major monetary policy instruments—for the first time since the height of the pandemic. 

There is more: China’s monthly lending data released Friday also showed economywide growth in debt and equity finance outstanding stabilizing at 11% year over year after months of sharp slowdowns, and bank lending ticking up. 

China’s monetary policy has shifted from a tighter stance to neutral.

The question is why now, especially just a few months after regulators specifically told banks to curtail loan growth for the rest of the year, according to a Bloomberg report in April.

On the more benign side, this might be partly a response to higher seasonal liquidity needs as tax season approaches—as the People’s Bank of China has asserted. The reserve ratio cut will release around 1 trillion yuan ($154 billion) of liquidity, but part of this will also be used to repay maturing loans from the central bank.

Other explanations are less palatable. 

China’s quarterly gross-domestic-product figures are due Thursday, and this might be an attempt to inoculate markets against bad news.

Of particular concern are recent data points on consumption and services, which have remained stubbornly soft over the past year despite the rapid rebound in industry. 

The employment gauges of China’s official services and construction purchasing-managers indexes both ticked down significantly in June, and improvement in the 31-city-surveyed unemployment rate stalled out in May. 

New orders in the export sector, a major employer, have tapered off as well.

Part of the trouble is likely temporary: namely a new, short-lived coronavirus outbreak in Guangdong province that shut down one of China’s largest ports. 

Even so, the fact that sporadic Covid-19 flare-ups are still causing such problems gives pause—especially given China’s dependence on homegrown vaccines whose efficacies against new variants such as Delta remain highly uncertain.

Other more fundamental factors might be at play, too. 

Chinese households are heavily indebted, and even more so after the lost income from the dark, early days of the pandemic—which were followed immediately by another housing price boom. 

Many young Chinese workers are feeling the pinch. 

The rapidly unfolding regulatory assault on the country’s previously fast-growing internet sector—one of the best sources of decent-paying jobs—seems unlikely to help.

One thing to watch in China’s second-quarter data will be the household savings rate. 

It jumped in early 2020 as consumers retrenched, fell in late 2020, and then jumped again unexpectedly in early 2021, according to Oxford Economics. 

A temporary outbreak of caution and ennui among China’s consumers is one thing, and not necessarily unexpected given the events of the past year. 

But a more lasting malaise could do serious damage to the country’s prospects—and the nation’s consumer-facing companies.

A short-lived coronavirus outbreak in Guangdong province shut down Yantian port. / PHOTO: STR/AGENCE FRANCE-PRESSE/GETTY IMAGES

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