The PBoC is staring down a daunting list of challenges, but don’t worry, China’s central bank is accustomed to tightrope acts.
Surging inflation “must be drawn to attention and properly handled”, the bank wrote, in its 57-page monetary policy outlook for the third quarter, hot off the presses on Saturday.
The reference is to the CPI, which hit a seven-year high in October. The problem, of course, is surging pork prices, which have driven food inflation into the stratosphere.
This ostensibly constrains monetary policy. If aggressive easing was already ill-advised from the perspective of encouraging bubbles and undercutting the ongoing deleveraging effort, it’s a non-starter when consumer prices are on that kind of trajectory.
The problem is that the Chinese economy is decelerating on almost every measure you care to consult. The most recent activity data showed industrial output, retail sales and fixed investment remain sluggish and factory gate prices are mired in deflation.
Imports have contracted for six consecutive months, and then there’s auto sales, which are in the middle of a historic slump.
In short, the economy needs stimulus, even if that contributes to upward pressure on consumer prices.
But the latest credit growth data suggests there simply isn’t much demand for credit. Aggregate financing crashed to the lowest in years in October.
Read more: China’s Credit Growth Collapses
“It should be noted that the current external environment is complex, the economy is under rising downward pressure, and some businesses are faced with operating difficulties”, the PBoC went on to say Saturday.
The bank reiterated its commitment to further RRR cuts. The second of two targeted cuts went into effect on Friday (recall that the across-the-board RRR cut announced in September was accompanied by a pair of targeted cuts, which were to be implemented in October and November), releasing an additional 40 billion yuan in long-term liquidity on the same day that the PBoC conducted a surprise MLF operation to inject another 200 billion yuan.
Still, it appears Beijing is taking a reactive, piecemeal approach to stimulus and liquidity provision as opposed to a proactive, “bazooka” approach. The bank essentially confirmed that on Saturday, noting it will “properly handle the short-term pressure”, but won’t be providing “excessive” liquidity.
The PBoC also brushed off PPI deflation, characterizing it as temporary. The main problem, the bank said, is the trade war.
Fortunately, China still has room to deploy conventional easing, unlike the PBoC’s counterparts in Europe and Japan (for example) where policymakers have hit the lower bound (the protestations of Philip Lane and Kuroda notwithstanding).
That privileged position – i.e., China’s claim to being a major economy with plenty of monetary ammo left to deploy – is something that Beijing should “actively maintain”, the PBoC said.