The central bank’s top researchers have agreed recently that higher interest rates will help to squeeze asset bubbles and restrain debt expansion, as a tool to be used with broader oversight of financial activities.
“There is room for an increase in interest rates in the short term as industrial product prices and enterprises’ profitability have improved since last year,” Ji Min, deputy head of the central bank’s research bureau, told China Daily over the weekend.
Inflation and foreign exchange rates also have to be factored in before adjusting interest rates, he said.
The head of the research bureau, Xu Zhong, expressed a similar opinion in November.
A possible hike in interest rates, along with the key lever of cutting the overcapacity of industrial producers, would further improve producers’ investment returns by curbing debt expansion regardless of the costs of borrowing, according to the officials.
In 2017, the country’s top policymakers identified financial risk prevention as a core policy through 2020. Financial regulators decided on abandoning the decades-long economic stimulus model, which encouraged cheap bank lending mainly for industrial production and infrastructure investments.
Reduction of the debt burden will continue this year in China, and will be advanced by coordinating monetary policy tools and the much broader regulatory framework overseeing cross-sector financial behavior.
This new framework, called Macro Prudential Assessment, which was advocated by international multilateral financial institutions, emerged in China since 2016.
The 19th National Congress of the Communist Party of China, held in October, identified it for the first time as one of the two primary parts of the “twin pillar” operational framework of monetary and macroprudential policies to prevent systemic financial risk.
Yin Yong, vice-governor of the People’s Bank of China, the central bank, said earlier that “the target of macroprudential policy tools is to prevent severe turbulence in asset prices, which would threaten economic stability.”
Asset prices－including bond, stock and real estate prices－are becoming more important as an indicator of residents’ economic and overall welfare situation, compared with consumer prices, the traditional gauge of inflation that central banks always use to anchor monetary policy targets, Yin said.
Huang Yiping, a member of the PBOC’s monetary policy committee, said the focus of financial regulators’ next move would be to continually broaden the scale of the supervision framework, improving coordination using a higher-level policy under the newly established Financial Stability and Development Committee led by the State Council. That indicates a tightening regulatory tone to prevent systemic financial risks.
Since the first quarter of 2018, negotiable certificates of deposit－a product for financial institutions to invest in the interbank market－will be supervised as part of the framework to assess potential financial risks, especially in the shadow banking business.
Housing loans and cross-border capital flows have been included in the macroprudential framework. Green financing and fintech business also will be considered part of the framework, according to the central bank.
It is in line with the conclusion of the 2017 Central Economic Work Conference, held in December, that it is crucial for major risk prevention to facilitate “virtuous cycles”, or sound policies, between the financial sector, the real economy and the property sector.
From a global perspective, the deleveraging process always goes hand in hand with interest rates hikes, as shown by the normalization of monetary policy after abnormal monetary easing programs employed after the global financial crisis, officials said. The US Federal Reserve is predicted to raise interest rates three times this year and the European Central Bank may also stop purchasing assets in the coming months.
During the deleveraging process, the key is to prevent large fluctuations of asset prices, which may lead to new risks, economists said.