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Chinese Monetary Policy: Minor Adjustments to Achieve Precision
Aspire | 21 July 2015

Article by: Wang Ying

The People’s Bank of China (PBOC) Monetary Policy Committee held its 2Q15 meeting in Beijing. The main agenda of this meeting was centered upon the developments of local and international economies and the movement of capital in the international markets. PBOC seeks to maintain stable growth and market liquidity through various monetary policies.

Similar Conclusion, Different Implication

Using the 1Q15 minutes of the PBOC meeting as a comparison, one would find that the main focus of the committee is no longer the price fluctuation in the commodities markets and the effects of other non-economical factors such as geopolitics towards the global financial markets.

Despite the fact that this meeting arrived at the same conclusion as the previous quarter PBOC meeting, analysts believe that “keeping a close watch on the developments of local and international economies and the movement of capital in the international markets” would carry a special meaning in times when the Chinese A Shares market experiences great volatility. This implies that the PBOC will give timely support to the A Shares market through monetary policies whenever it is needed.

In fact, the central bank has implemented measures such as lowering interest rates and required reserve ratio on 28 June 2015. Spokesman from the PBOC said in a statement that these measures were meant to lower corporate finance cost but the market viewed it more as a support for the tumbling A Shares.

Expect Minor Adjustments Instead of Full Scale Easing

At a press conference on 8 July 2015, PBOC reiterated their support for a stable growth in the stock market through market maker China International Capital Corporation (CICC). To ensure adequate capital flow in the market, CICC will be interfering with the market through interbank borrowings, issuing of bonds, mortgage financing and loan refinancing.

The data from the recent release of 1H15 economic figures show a positive move towards market growth. Most notably, the M2 money supply has swiftly recovered and is near the annual target of 12 percent while new loans for June reached nearly RMB 1.3 trillion (new high in six years). Judging from the high corporate financing cost, analysts expect that PBOC will be lowering interest rates in 3Q15.

However, there is ample liquidity in the market currently. This might cause the central bank to put a hold on the implementation of new monetary policies as they observe the market in the coming month.

Chances of a full scale easing in monetary policies have significantly decreased as liquidity traps and the surge in property prices will restrict the scale of such policies. Instead of implementing a full scale easing (by decreasing required reserves and interest rates), PBOC will more likely deploy minor adjustments. Therefore, it is not practical to expect a further increase in market liquidity driven by the central bank in 2H15.


Wang Ying has a doctoral degree in economics and she is an economist of CBN Financial Research Institute. Her fields of research include macroeconomic trends, industrial policies and regional economic development.

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