China’s Central Bank clarifies its monetary stance

May 27, 2016

SINGAPORE - The Peoples’ Bank of China Monetary Policy Analysis Team released an article last night clarifying its monetary policy orientation. The views in the article represent the ultimate stance of the Chinese central bank, according to an ANZ Research report.

“We believe, through this article, the PBoC aims to reiterate how current monetary policy accommodates President Xi Jinping’s call for ‘supply side structural reform’ to smooth concerns about potential conflicts between the current monetary policy stance and risks highlighted by the ‘mysterious authority’, ie high leverage,” the report says.
“In addition, the PBoC wants to prepare the market to expect slower-than-expected M2 growth in the few months ahead and attribute that to the base effect. They do not want the market to interpret slower M2 growth as policy tightening.     
“The tone and content of the article is consistent with our views on China’s monetary condition and policy outlook. Economic headwinds will continue to press the PBoC to keep interest rates low and stable.
“The policy outlook is moderately accommodative, not monetary tightening. As a benchmark, the 7-day repo rate will be largely staying at 2.00-2.50% in 2016.
“The PBoC will shift to a more targetted approach and deploy policy tool kits more flexibly. This report reinforces our out-of-consensus call for only one additional RRR cut of 50bps in the rest of 2016. The extent of monetary easing will be less aggressive.
“The next few months will continue to see slower growth of M2 compared with M1. Yet this change of deposit structure should be a short-term phenomenon. M2 growth will return to normal once the base effect dissipates.” www.live.anz.com (ATI).