A man walks past the People's Bank of China (PBOC) headquarters in Beijing.
Hong Kong: China should tighten monetary policy as signs of overheating emerge amid quickening inflation, according to the top-ranked forecaster for the nation’s economy.
With policy makers torn between reining in price gains and stabilising growth, corporate lending has become too cheap, said Song Yu, chief China economist at Beijing Gao Hua Securities Co. The real interest rate for companies, the lending rate minus producer price increases, has turned negative for the first time since 2011 as the People’s Bank of China (PBOC) kept its benchmark lending rate at a record low and the economy snapped out of a deflationary funk.
“Economic growth is trending down gradually while inflation is trending up,” said Song, whose firm is Goldman Sachs Group Inc’s joint-venture partner in the mainland. “This makes it hard for policy makers to be decisive in moving in one direction or the other.”
Song, 38, who holds a master’s degree from Oxford University and used to work at the Federal Reserve and European Parliament, was the top ranked forecaster for Chinese economic indicators in the fourth quarter of last year, according to data compiled by Bloomberg. That continues a winning stretch dating back to late 2012. The rankings measure the accuracy of analysts’ estimates for key data releases.
China’s policy makers are in a bind: While faster inflation and US rate increases argue for monetary tightening, steady economic growth is also key as leaders brace for potential trade tensions amid Donald Trump’s protectionist threats and a reshuffle of high-level Communist Party officials this year. Instead of raising benchmark borrowing costs, the PBOC has pushed up money-market rates since August, sparking a bond selloff.
Yet to Song, the tightening has been too little, too late, and too ambiguous. The PBOC’s mixed signals have caused money-market rates to go from low and steady to high and volatile, which can lead to “misunderstandings about policy intention,” said Song. With monetary policy constrained by an inflexible exchange rate, China is also becoming more reliant on administrative measures such as capital controls or lending guidance, rather than market-based tools, he said.
“This is a big challenge from a reform perspective,” he said.
In another illustration of the PBOC’s balancing act, it raised the rates on its Medium-term Lending Facility yesterday, which injected 245.5 billion yuan ($36bn) into the financial system. Swap rates and bond yields jumped on the news.
China’s economy is faring better than even Song had anticipated. Amid a rocky start to 2016 in currency and stock markets, he said at the time there was no need to panic, forecasting full-year growth of 6.4 percent.
