China Combats Economic Slowdown With Monetary Stimulus

Monetary policy is one of the most prominent topics these days, as price stability directly affects the consumers. Governments took different measures during the recovery period. While most economies are adopting tightening monetary policies to control inflation rates, China is acting differently.


The US, along with most economies around the world, have adopted reversal easing policies during 2021 after a period of monetary easing; however, China is increasing its fiscal spending and is offering additional monetary stimulus by increasing government purchases shifting to policy easing since the end of the previous year, as Chinese economic growth slows down with the GDP growth rate falling from 7.9 % to 4.9% during Q3 of the previous year.


China has witnessed several challenges that hurdled its economy during 2021 including its trade war with the US, real estate crisis, power shortage, and Covid-19 repercussions as the rest of the world. Those challenges caused an economic slowdown in the country.   


By the end of the previous year, China has decreased interest rates to increase the money supply in the market, in which the Broad M2 grew from 8.5% in November to 9% in December of the previous year. And It is also expected to increase in 2022 to combat the current economic challenges. The government has declared an increase in the issuance of special local government bonds worth 3.8 trillion yuan in 2022 from 3.65 trillion yuan- worth of special local government bonds in 2021 while holding a lower interest rate.


It is expected that the PBOC will impose cuts on the reserve requirement ratio by about 1 % increasing the money supply in the market to induce economic activities. Also, a decrease of 0.2 % in lending interest rates will cause the yield spread between US Treasuries and Chinese government bonds to decrease. 


We can already observe that the 10-year Chinese and the US treasury bonds yield curves were moving in tandem during 2021; however, since December 2021 they both diverged and the spread between them increased. The Chinese yields fell from the highest peak in the year 2021 of around 3.4% in February to around 2.79 % in January 2022 as the government showed monetary easing with the first-rate cuts by PBOC of 0.5 % in December to reach 3.8%, and then it cut the loan prime rate furtherly by 0.1 % to reach 3.7%. The PBOC has also cut the 5-year loan prime rate from 4.65 % to 4.6 % to affect the pricing of housing, while the yield on the 10-year US treasury bond is rising toward its 2021 peak reaching a yield of 1.77 %.


As the monetary policy loosens, it is expected that the increase in lending will continue especially to the real estate sector to overcome their liquidity calamity during the first quarter of the current year. Although, bank loans increased by about 1.6% during 2021 from 19.63 trillion Yuan to 19.95 Yuan. However, it decreased during December from 1.27 to 1.13 trillion Yuan.


With all the monetary and fiscal reforms, the Chinese government has succeeded in tamping-down the producer price index (PPI) from a high record of 13.5 % in October 2021 to 10.3 % YoY in Dec 2021. Moreover, the consumer price index (CPI) fell from 1.017 % to 1.014 %. The annual inflation rate has also fallen from a high record of 5.4 % during 2020 to reach 1.5 % during the end of the previous year.


Monetary policy is an essential part of the economy. It is a key factor for economic growth, financial market stability, interest stability, employment rate, and stability of foreign exchange markets, so the investor must continuously follow the recent news.


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