China:PBOC Q4monetary policy report emphasizes “stable and neutral”stance,underscoring hawkish polic
The Q4 monetary policy report released over the weekend calls for “stable andneutral” monetary policy going forward, adopting the same phrase from lastDecember’s Central Economic Work Conference. This clearly strikes a hawkish tonein our view, as it is in contrast with the report’s characterization of the past policystance (described as “stable and relatively loose on occasions”). The report alsosheds a bit more light on the asset size of banks’ off-balance sheet wealthmanagement product exposures.
In the PBOC’s official communication, any shifts in policy stance are seldomexplicitly commented upon, and even when they are the language used is often fairlysubtle. By that standard, in our view the Q4 monetary policy report is quite clearabout the PBOC’s acknowledgment of the accommodative nature of its policystance in the past year. The report points out that M2 growth has still been fasternominal GDP growth, and suggests that money is still increasing at a high pacerelative to the actual need of economic growth. It also highlights a challenge facedby the PBOC—given that “various parties” hope for loose monetary conditions andwould like the central bank to increase money supply when financial risks arise,credit extension has displayed “relatively strong impulsiveness”. In practice, theimplementation of monetary policy has been “stable and relatively loose onoccasions”, under the influence of various factors such as downward pressures ongrowth and volatile financial market movements.
On inflation, the report signals that the PBOC is moderately concerned about theupside risk to CPI given solid growth momentum and higher inflation expectations(according to PBOC survey), though it also points to the offsetting forces includinghigh base effect. Regarding the ongoing surge in PPI, the report attributes part ofthat to structural supply-side reforms, but maybe an even larger part to demandsupport for heavy industrial products driven by strong housing and infrastructureinvestment. Similarly, the report suggests that improvement in corporateproductivity has been largely concentrated in only select industries in mid-toupstreamsectors (e.g., coal, steel, chemicals), and many structural imbalancesremain. The report’s narrative on the PPI drivers and industrial corporate health isbroadly shared by our own analyses (see here, here and here) and the significant acceleration of our fixed investment tracker in 2016 (in contrast to continued investmentdeceleration shown by official FAI data).
On the PBOC’s Macroprudential Assessment framework (MPA), the report elaborateson the forthcoming inclusion of banks’ off-balance sheet wealth management product(WMP) assets in the assessment, a development that was first officially confirmed inDecember. As background, one of the prudential metrics focused in the MPA has beenthe year-on-year growth pace of each bank’s (on-balance sheet) “broad credit” assets,which include loans, equity and other investment, exposures to non-bank financialinstitutions, etc. But beginning Q1 2017, the metric also covers non-cash and nondepositassets held by off-balance sheet (i.e., non-guaranteed) WMPs managed by eachbank. The report reveals that off-balance sheet WMP assets managed by banks weremore than RMB 26tn at end-2016, rising at over 30%yoy, according to data gathered bythe PBOC. Compared to earlier-released information on off-balance sheet WMP capital(of RMB 17.4tn at end-2015, according to Bank WMP Registry Center), this then impliesan average leverage ratio at roughly 1.15x at end-2015. While this does not seem veryhigh, leverage risk may be particularly elevated in select WMP pockets. But to moresystematically manage financial risks embedded in WMPs, the report emphasizes theneed to strengthen the existing legal and supervision framework governing the assetmanagement industry.
Lastly, the report indicates that the weighted average general bank loan rate fell to5.44% in December last year, about 21bp lower than in September. Excess reserve ratiowas 2.4% at end-December, much higher than 1.7% at end-September—this mightpartly reflect the PBOC’s bias to keep interbank liquidity very ample shortly after therapid bond sell-off in mid-December.
