- As the global economy improves, investors will closely watch monetary policy worldwide—the scrutiny is particularly intense on China.
- Though China hasn't yet raised interest rates, the government and central bank are acting to slow bank lending.
- What may seem like significant monetary tightening is actually more like easing off the gas than hitting the brakes.
- Not all global monetary policy will match China's. Economic conditions will rightly dictate policy country by country.
As the global economy improves, investors will closely watch monetary policy worldwide. The concern is two-fold: Either governments and central banks won't rein in stimulus quickly enough and the economy will overheat, or they will move too quickly and choke recovery. The scrutiny is particularly intense on China's central bank, the People's Bank of China (PBOC). China's recovery has been robust, credited in part for pulling the world from the economic mire. But what happens if their central bankers go too far—or yank the rug too soon?
Seems the PBOC and Chinese government have the same questions on their mind. Though China hasn't yet raised interest rates, neither are they standing idly by. Officials are "encouraging" banks to be prudent with lending and setting a lower goal for overall 2010 lending (7.5 trillion yuan vs. 2009's record 9.6 trillion). Meanwhile, the PBOC has raised reserve requirements twice and sold government notes to absorb excess liquidity. The result? Chinese banks lent less in February than January, and less in March than in February.
This may seem like significant monetary tightening, but it's actually more like easing off the gas than hitting the brakes.
Despite the slower pace in February and March, Q1's total lending was the fastest start to any year other than 2009, when the government instituted its massive fiscal stimulus. Overall, lending hasn't fallen off a cliff. Q1 lending outstripped the government's target pace—total Q1 lending was 35% of the year's 7.5 trillion yuan quota compared to the government's 30% target. Broad money supply growth (M2) has slowed year over year—but only from 25.5% in February to 22.5% in March (still a much faster pace than in developed countries).
Chinese monetary policy appears appropriate for now, gradually soaking up the excess without tightening too much. Inflation is in check (CPI rose 2.7% and 1.5% year over year in January and February) even as the economy posts solid growth.
But not all monetary policies will match China's. Economic conditions will rightly dictate policy country by country. So far Australia, Malaysia, Indonesia, and Vietnam have raised interest rates. By contrast, the UK, Japan, Europe, and the US all recently elected to hold steady on monetary policy. That difference highlights where recovery was earliest and now seems most firmly rooted (Australia/Asia, Emerging Markets).
Policymakers must tread carefully as recovery continues, but they likely have more leeway than commonly thought—there's no exact "right" time or method for easing stimulus. The monetary exit will necessarily be spread out over months, even years. And while there may yet be small miscalculations, or even large ones, for the time being, no country's monetary policy appears show-stopping.