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China’s Monetary Policy Moves towards Aggregate Stability and Credit Easing

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On February 11, the People’s Bank of China (PBoC) released the China Monetary Policy Implementation Report for the Fourth Quarter of 2021 (hereinafter referred to as the “Report”). The Report examines the central bank’s transition to a moderately loose monetary policy in the fourth quarter of 2021, as well as the macro condition and monetary policy outlook for 2022. In the view of ANBOUND researchers, monetary policy will continue following the moderately relaxed framework to achieve the goal of “stable growth”. However, when it comes to quantitative and structural policies, the central bank continues to highlight the fundamental framework of giving quantitative and structural policies equal weight.

This implies that the central bank’s monetary policy would adopt more structural measures to tackle the problem of credit easing, in order to increase the ability of social credit creation, on the basis of sticking to aggregate “stability”.

Regarding the implementation of monetary policy in 2021, the central bank report concluded that it basically achieved its policy objectives. These are reflected in the following: first, monetary and social financing growth rates matched and were slightly higher than nominal GDP growth rates, ensuring a “reasonable abundance” of liquidity; second, the macro leverage ratio remained stable but is decreasing; third, credit rates declined; fourth, the financing structure has improved, and support for SMEs and the real economy has increased; Fifth, the exchange rate has been stabilized and has added to its flexibility. The Report suggests that monetary policy in 2021 showed flexibility, precision, rationality, and moderation, while major financial indicators continued to maintain strong growth on a high base in 2020, with solid financial support for the real economy. Thus, in the future, monetary policy will still be adjusted around these aspects, which constitute the main aspects of monetary policy objectives.

As for the future trend of monetary policy in 2022, the Report shows that a prudent monetary policy should be flexible and moderate. It also requires the strengthening of cross-cycle regulation, at the same time emphasizing on the dual functions of monetary policy tools in terms of quantitative and structure. It is important to focus on adequate, accurate and forward-looking efforts, not only to refrain from engaging in strong stimulus policies, but also to meet the reasonable and effective financing needs of the real economy. Concurrently, it should increase the financial support for key areas and weak links in order to develop a better blend of steady total volume and outstanding structure. This practically indicates that, after encouraging aggregate easing in the previous phase, the PBoC has begun to revert to a long-term strategy that emphasizes both quantitative and structural factors. In particular, the Report believes that the gap between supply and demand of the global economy is expected to close in the future, and coupled with the gradual emergence of the high base effect, it is estimated that the year-on-year growth rate of PPI in China will continue to decline in 2022. Overall, China’s economic supply and demand are basically balanced, and the PBoC’s implementation of normal monetary policy is conducive to the price trend to remain stable in the medium and long term. This judgment shows that in the future, domestic monetary policy will not adopt “overall easing” but will still remain prudent to maintain aggregate “stability”.

The monetary policy in the future will adhere to the “prudent” tone and focus on the policy framework that emphasizes on both quantitative and structural aspects. In terms of quantitative policy, the PBoC still follows its previous objective of “matching the growth of money supply and social financing scale with nominal GDP” and maintaining a stable macro leverage ratio. The continuation of this statement reflects that the policy objective of aggregate “stability” has not changed. The Report noted that, when analyzing the liquidity situation of the banking system, it is advisable to concentrate on the overall framework of the central bank’s liquidity management rather than local factors. It added that it would not be possible to simply add some short-and long-term influencing factors to estimate the liquidity surplus or deficit, let alone the maturity of monetary policy instruments as a factor affecting the liquidity of the banking system and use this to judge the degree of liquidity tightness. From here, it can be seen that the PBoC will center on maintaining stable liquidity on money supply issues, adhering to the long-term goal of annual or “cross-cycle”, and make changes in the growth or decrease of short-term liquidity to fully utilize monetary policy’s adjustment function.

The current total supply control, as it stands, is different from the currency, social finance, and credit mentioned earlier. This time, the PBoC gives more emphasis on maintaining the growth of the credit scale. This is also a response to the current slowdown in credit scale growth, indicating that the central bank’s focus has also shifted from easy money to easy credit. This is done so with the intention of further strengthening of the structural policy. The Report mentioned that it aims to improve the money supply regulation mechanism. It furthermore targets to continue easing the liquidity, capital and interest rate constrains on bank credit supply, in addition to cultivating and stimulating credit demand in the real economy, so as to guide financial institutions to effectively expand credit supply. The statement by the PBoC implies that money supply is merely one of the restraining factors in promoting credit growth. Bank capital replenishment and interest rate adjustment may be two other directions that will be undertaken by the Chinese central bank in the future to encourage credit development.

It is worth noting that this time, the central bank reemphasized not to engage in mass stimulus policies, and that the previous phase of a series of easing measures such as reserve requirement and interest rate cuts have achieved results. In the meantime, the pace of total easing in the future will be adjusted, with more emphasis on the function of “structural optimization” in order to further optimize the credit structure and serve as a major tool for adjusting credit costs. These are to increase support for small and micro enterprises, science and technology innovation, green development and other key areas. A significance of such a development is that, there will be some emphasis on the use of structural instruments in the future, and the corresponding expansion of the scale of refinancing instruments will continue to be maintained. For the future of real estate finance policy, the Report mentioned that it will firmly adhere to the position that houses are for living in, not for speculation. It insists that real estate should not be used as means of short-term economic stimulus. Moreover, it projects the objectives of stabilizing land and housing prices. It also mentioned implementing a prudent management system for real estate finance, increasing financial support for housing leasing, safeguarding the legitimate rights and interests of housing consumers, meeting the reasonable housing needs of homebuyers, and promoting the healthy development and virtuous cycle of the real estate market. From this point of view, the real estate market puts more emphasis on meeting “reasonable demand” and is not the main area for the central bank to promote credit scale growth.

The PBoC’s monetary policy report still focuses on the reform of interest rate and exchange rate mechanisms to promote the long-term goals of reducing financing costs and maintaining the stability of the renminbi exchange rate. Among the exchange rate objectives, this is a major highlight. It indicates that the central bank is more concerned about domestic “stable growth” and “risk prevention” and will continue to maintain an overall loose policy for a certain period of time, which may lead to a gap between the monetary policies of China and the U.S. The renminbi exchange rate may face some pressure after the Federal Reserve tightens its policy. Whether the PBoC’s monetary policy will converge to the direction of the Fed’s tightening policy in the future still needs to be determined by the development of China’s domestic economic situation.

ANBOUND Research Center (Malaysia) is an independent think tank situated in Kuala Lumpur, registered (1006190-U) with laws and regulations of Malaysia. The think tank also provides advisory service related to regional economic development and policy solution. For any feedback, please contact: malaysia[at]anbound.com.

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The Waning Supremacy of the Petrodollar Economy

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Since the 1970s, the US dollar has been the undisputed reserve currency around the globe. Agreements with Saudi Arabia (and many other Middle Eastern countries) cemented the global oil trade in the greenback currency. Trading oil and gas futures denominated in the US dollar solidified the position of the United States as the hegemon of Global trade – a shift from the traditional gold standard. While the Euro surfaced as a strong contender in the 90s, the dollar-denominated finance still flourished. And economies like China and Russia had no choice but to hold US Treasury securities and accumulate massive dollar reserves. However, multiple geopolitical and economic factors are now turning the tide against the supremacy of the US dollar. Rapid globalization was already a ticking bomb situation for the greenback. But now, China’s rise as the next potential powerhouse and Russia’s exclusion from the dollar-embedded SWIFT system is catalyzing this historic transition.

The tread towards de-dollarisation is not exactly a novel phenomenon. The infamous drift to exclude the US dollar originally spurred in Latin America in the 90s. In response to US sanctions, Venezuela attempted to shift away from the status quo by opting for oil payments in yuan over the US dollar. Chile resorted to Consumer Price Index (CPI) indexation to attract foreign investments in local securities over US Treasuries in the secondary market. However, due to weak supplementary monetary policies and crippling economic crises, the trend of de-dollarisation steeply reversed during the 2008 financial crisis. Since then, no significant development has threatened to derail the dominance of the US dollar. Yet, the booming Asian markets and the implicit rift between the United States and Saudi Arabia could be the next bad omen.

Saudi Arabia is the world’s largest Crude exporter, amounting to about 17.2% of the Global Crude oil exports (by value). Over decades, Saudi Arabia has been one of the core allies of the United States in the Middle East. Economically, the kingdom has served as the largest Crude supplier to the United States. Moreover, as Saudi Arabia leads the Organization of Petroleum Exporting Countries (OPEC), the United States has enjoyed a sway over Global oil prices. Since the oil trade is denominated in the US dollar, it has allowed successive US governments to run massive trade deficits without any budgetary concern. Geopolitically, the Saudi kingdom has been a US proxy in the Middle East to counter its arch-rival Iran. After the landmark Iranian revolution in 1979, Saudi Arabia further climbed the ladder of US preference in the region. However, with a shift from Republicans to Democrats, the two allies have inched apart to a certain extent.

Over the years, the United States has relented its dependence on imported oil by building its own strategic reserves. For example, the US imported an estimated 2 million barrels per day of Saudi Crude in the 1990s. That figure fell to mere 500,000 barrels per day in 2021 – a drop of 75% in a couple of decades. On the political front, the Saudi royalty has been particularly dissatisfied with Biden’s policy in the Middle East. Biden’s decision to unilaterally withdraw support for Saudi Arabia in the Yemen war distanced the kingdom from the US administration. A subsequent spree of Houthi attacks on Saudi oil facilities has further incensed the royalty. To add oil to the fire, Biden’s desperation to salvage the outdated Nuclear Deal with Iran has virtually alienated the kingdom to the point of indifference.

The implications are not complex to spot. Since Russia launched its onslaught against Ukraine in February, Saudi Arabia has actively refused to pay heed to Biden’s calls to expand Crude supply quotas and suppress Global oil prices. Instead, the OPEC+ alliance – OPEC members, Russia, and other allied producers – stuck to its original plan to modestly raise the June output target by 432,000 barrels per day. The brutal indifference to the Western calls has an underlying reason besides the concurrent row with the United States. The reason is the growing China-Saudi cooperation. Over the past few years, Saudi’s structure of the international oil trade has undergone a fundamental change. That is predominantly due to increasing cooperation of China which is not just limited to the energy sector. Under the hood of its Belt and Road Initiative (BRI), China has also objectively expanded its potential presence in the kingdom through bilateral cooperation in infrastructure, trade, and investment.

According to the American Enterprise Institute’s China Global Investment Tracker, cumulative Chinese investments in Saudi Arabia reached $43.47 billion in 2021. According to data released by the Chinese General Administration of Customs (GACC), China imported an estimated 542.39 million tons of Crude oil in 2020 – comprising more than 25% of the kingdom’s total Global oil exports. Sources from Saudi Arabia’s top securities regulator suggest that the kingdom’s Sovereign Wealth Fund may soon start investing in Chinese companies after years of limiting its overseas holdings in the US and Europe. Official sources suggest that Saudi oil giant Aramco is in talks to strike a partnership with the Chinese petrochemical consortium. Recently Aramco also finalized a $10 billion deal with Chinese petroleum companies. All the factors unambiguously point in a single direction – Saudi Arabia is leaning away from the US to China. Naturally, the de-dollarisation of trade and investments would facilitate bilateral relations with China.

There are, however, some drawbacks to the petroyuan when compared to its counterpart. While China’s financial markets have exponentially grown over the past few decades, they are still relatively illiquid compared to the US capital markets. Moreover, the massive $13.4 trillion eurodollar market extensively facilitates trade in European markets. Meanwhile, trades in yuan would be limited to China and subject to manipulation from the People’s Bank of China. Thus, trades settled in yuan would be an inconvenience to the smooth operation of trade and short-term deposits. However, these problems could be resolved if petroyuan is used as a barter for investments in China.

Like Saudi Arabia, economies like Russia and Iran have also inched closer to Asia. Russia, for instance, has consistently voiced its propensity to shift toward the Cross-Border Interbank Payment System (CIPS) – a transaction system clearing international settlements and trade in the Renminbi – to trade its oil in Asia under western sanctions. India has openly defied the US pressure by purchasing roughly 15 million barrels of oil from Russia since the invasion of Ukraine. The Russian Crude now accounts for about 17% of Indian imports – up from less than 1% before invasion. The rudimentary reason is cheaper oil in Roubles, especially when Europe is still weighing an embargo on Russian oil. Even Iran has notoriously traded Crude with China under US sanctions by abandoning the US dollar for settlements.

Some economists may argue that even combined, the effect of de-dollarisation would be gradual and uneconomical. But we need to understand that the historical context is skewed, and ground realities today are comparatively different. Firstly, the economies in Asia are significantly less dollarised than the emerging economies of Latin America discussed in the existing literature. Secondly, the Asian economies – particularly China and India – are much more significant in terms of size and monetary policy. Even a shift towards semi-dollarisation could upend the clout of the United States and significantly reduce the power of US sanctions.

The US lawmakers are understandably irked by the defiance of the OPEC+ alliance. Recently, a US Senate Judiciary Committee passed the No Oil Producing or Exporting Cartels (NOPEC) bill to amend the US antitrust law. If passed by the full Senate and House, the US Attorney General would gain the authority to expose OPEC+ countries to lawsuits for possible collusion, bypassing the sovereign immunity guaranteed to OPEC+ nations. While similar motions have been filed and failed over the past two decades, the notable highlight is the US desperation in the face of helplessness. Saudi Arabia already warned the US lawmakers in 2019 that such a bill, if passed, would force its move to trade oil in different currencies. Today, with Europe’s belated timeline to phase away from Russian Crude to China’s expanding influence in Eurasia, it seems the inevitable transition from the petrodollar may strike sooner than initially expected – if expected at all!

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Chinese Maritime Strategy: Further Expansion and Progress

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The Belt and Road Initiative represents a shift in China’s global perspective as well as an update to its role and status in the international system, as announced by Chinese President Xi Jinping. Reviving the Silk Road as a means of connecting China with the rest of the globe was the biggest initiative so far. This initiative will connect China with the Arab Gulf states and the Mediterranean through Central Asia. The maritime silk road will connect China’s coast with Europe by way of the South China Sea and the Indian Ocean. It will also connect China’s coast with the South Pacific by way of the South China Sea.

The “string of pearls” strategy, which refers to a network of Chinese military and commercial facilities and relations on the length of the sea lines of communication, which extend from the Chinese mainland to the Horn of Africa, was used to secure Beijing’s global vision of military protection, diplomatic networking, and economic cooperation.

Some scholars believe that this would be a major threat to Britain which relies on the Commonwealth, China is gaining more influence in South Asia through the China-Pakistan Economic Corridor and the loan diplomacy, which weakens British influence in the Indian ocean. It also challenges Britain in the strategically important Malacca channel.

Experts mention that a state may only be considered powerful when it completely dominates its geographical surroundings. Aside from its strategic location on the international trade route, where 40 percent of all trade passes through the South China Sea and 30 percent of all oil traded globally. Beijing places a high value on the security of China’s regional environment.

China has overtaken the United States to become the world’s largest naval force – but experts believe that the mere comparison of the number of ships neglects many crucial elements that define the efficacy of any naval power.

The United States maintains, so far at least, a huge edge in many naval capabilities, as it has 11 aircraft carriers compared to China’s two. It also excels in the numbers of submarines, destroyers, cruisers, and huge nuclear-powered vessels. But it is projected to considerably enhance the size of the Chinese fleet.

Former Chinese People’s Liberation Army colonel Zhou Bo, currently at Tsinghua University in Beijing, says it is “extremely necessary” for China to build its navy in order to confront the maritime dangers it faces. He particularly says that “the largest challenge we are experiencing is what we regard as US provocations in Chinese territorial seas.” The US Navy expects that the total number of warships owned by the Chinese Navy would expand by 40 percent between 2020 and 2040.

Controlling waterways is a priority for Beijing. Attempts will be made to broaden its maritime presence outside the Indian Ocean, if possible. It is clear from this that China is interested in building strategic fulcrums around the world, such as huge ports equipped with sea cables and digital networks, as well as superior logistics services that might be used for military purposes if necessary.

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China and the Indo Pacific Economic Framework

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Image: Twitter@POTUS

The Indo Pacific Economic Framework (IPEF) signed by a total of 13 countries, on May 23, 2022, in Tokyo is being dubbed by many as a means of checking China’s economic clout in Asia and sending out a message that the US is keen to bolster economic ties with its allies and partners in the Indo-Pacific.

Many Chinese analysts themselves have referred to the IPEF as ‘Economic NATO’. China has also been uncomfortable with the Quadrilateral Security Dialogue (Quad) which consists of US, Australia, Japan and India , and has referred to Quad as an ‘Asian NATO’ – though members of the grouping have categorically denied that Quad is an ‘Asian NATO’

Countries which joined the US led IPEF are Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. These countries together account for 40% of the global GDP. The four key pillars of the IPEF framework are;  supply-chain resilience; clean energy, decarbonisation and infrastructure; taxation and anti-corruption; and fair and resilient trade.

While launching the plan, US President, Joe Biden said:

‘We’re here today for one simple purpose: the future of the 21st Century economy is going to be largely written in the Indo-Pacific. Our region,’

US Commerce Secretary Gina Raimondo while commenting on the IPEF said that it was important because it provided Asian countries an alternative to China’s economic model.

A few points need to be borne in mind. First, many of the countries — Australia, Brunei, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam – which have signed the IPEF are also part of the 15 nation Region Comprehensive Economic Partnership (RCEP) trade agreement of which China is a key driver (Indonesia, Phillipines and Myanmar have not ratified RCEP). RCEP accounts for 30% of the world’s GDP. Trade between China and other member countries has witnessed a significant rise, year on year in Q1 of 2022.

Second, many of the countries, which are part of the IPEF, have repeatedly said that they would not like to choose between China and US. The Singapore PM, Lee Hsien Loong  who was amongst the first to hail the IPEF, has emphatically stated this point on a number of occasions. In an interview to Nikkei Asian Review on May 20, 2022, Lee Hsien Loong reiterated this point. In fact, Lee Hsien Loong even pitched for making China a part of the Comprehensive and Progressive Partnership for Trans Pacific Partnership (CPTPP) (TPP the precursor to the CPTPP was a brain child of the US). Said the Singapore PM:

‘We welcome China to join the CPTPP,’.

Here it would be pertinent to point out, that China had submitted an application for joining the CPTPPIN September 2021. In the interview, Lee Hsieng Loong did state that countries in Asia needed to have good relations with US, Japan and Europe.

 Indonesia’s Trade Minister Muhammad Lutfi who attended the signing of the IPEF on behalf of the President Joko Widodo stated that he did not want to see IPEF as a tool to contain other countries.

One of the reasons why many countries are skeptical about the IPEF is the fact that it does not have any trade component. A number of ASEAN member states have pointed to the IPEF making no mention of tariffs and market access as one of its major draw backs. At the US-ASEAN Summit, held earlier this month Malaysian Foreign Minister, Ismail Sabri Yaakob had referred to this point. Like many other countries, Malaysia has welcomed the IPEF, but in the immediate future sees RCEP as a far greater opportunity.

US President Joe Biden has not deviated significantly from the policies of his predecessor, Donald Trump, with regard to trade and the US is unlikely to return to the CPTPP at least in the immediate future.  Biden and Senior officials in his administration have spoken about the need to check China’s growing economic influence, specifically in Asia, and to provide an alternative model. While the US along with some of its Indo Pacific partners has taken some steps in this direction (only recently, leaders of Quad countries during their meeting at Tokyo announced that they would spend USD 50 billion, in infrastructural aid and investment, in the Indo Pacific.

 Given his low approval ratings, and diminishing political capital it is unlikely that he is likely to change his approach towards trade significantly. US Trade Representative Katherine Tai said the TPP was ‘fragile’, and that there was no domestic support for the same.

 In conclusion, while the IPEF does have symbolic importance it is important to bear in mind that many signatories themselves have close economic relations with China and would not like to get trapped in competition between US and China. Unless the US re-examines its approach towards trade, which is highly unlikely, and unless countries which are part of the Indo-Pacific vision are able to strengthen economic cooperation, China is likely to dominate Asia’s economic landscape – even though there is growing skepticism with regard to the same.

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