BEIJING — China’s central bank will not resort to quantitative easing (QE) to inject liquidity into the market, it vowed on May 8, as the official monetary stance faces great scrutiny during a period of economic headwinds.
In a policy report for the first quarter, the People’s Bank of China (PBOC) said “greater attention will be paid to anticipatory adjustments and fine-tuning” and stressed the need for balance between controls and looseness in monetary policy.
The central bank reiterated that it will maintain its “policy of continuity and stability”.
The PBOC will use monetary policy tools to manage liquidity in the market and adjust its policy in line with supply and demand for liquidity, inflationary pressure and economic development, it noted.
On the other hand, the central bank said it will guard against risk of excess liquidity which could exacerbate economic distortions and increase debt and leverage in the world’s second-largest economy.
China is aiming to reorient its economy to a sustainable growth model that is less reliant on investments and credit expansion, albeit one involving slower growth.
The economy, under this “new normal”, expanded 7 percent in the first quarter, the lowest quarterly growth since 2009.
China’s protracted economic weakness comes amid subdued pricing, which normally provides leeway for policy makers to ease monetary policies. Speculation abounds as to whether China will join the QE club.
“The monetary policy adjustments should be in tandem with deepening reforms and the market will be given the decisive role in allocating resources,” said the PBOC, promising efforts to strengthen the financial sector’s ability to serve the real economy.
China has relatively ample room to use various monetary tools to effectively manage and supply liquidity, and there is no need to use QE to inject a large amount of liquidity into the market, said the PBOC.
QE, in essence, is a monetary policy with an accelerated expansion of a central bank’s balance sheet while policy rates are close to zero. Some advanced economies like the United States and Japan used QE to stimulate lending and spending activities.
However, China has more room than many advanced economies to cut interest rates and the reserve requirement ratio (RRR), the amount of cash banks must park at the central bank, according to analysts. They say the market is misusing the term QE with regard to China’s monetary policy.
The recent interest rate cuts and RRR cuts were normal anticipatory adjustments and fine-tuning, and should not be read as the type of QE used in countries that have witnessed zero interest rates, said Peng Wensheng, chief economist at CITIC Securities.