China central bank signals it will dial back pandemic stimulus

BEIJING – The People's Bank of China (PBOC) signalled it may start gradually scaling back some of the stimulus implemented during the pandemic as the economy begins recovering and credit demand picks up.

Most of the structural tools – increasingly used by the central bank since 2020 to target specific areas of the economy – were “temporary”, Mr Zou Lan, head of the monetary policy department, told reporters in Beijing on Thursday. The PBOC will exit the tools, most of which have a clear time period for an end, “as scheduled” after relevant problems in the economy are addressed and the policy goals are accomplished, he said.

The targeted policies include relending programmes, where the PBOC provides cheap funding to banks, so they can boost loans to small businesses and green technology projects. The expansion of those tools last year pushed up the PBOC's balance sheet by the most in six years, even as other major global central banks shrank their assets.

The PBOC's comments suggest while the outstanding amount of the programmes probably wouldn't decline significantly this year, “the growth may slow down,” analysts at GF Securities wrote in a report. The scaling back of the tools will be gradual, they added.

That shift may already be happening. The PBOC's data show growth in the structural tools slowed to 5 per cent in the first quarter from 16 per cent in the previous three months. The outstanding amount rose slightly to around 6.8 trillion yuan (S$1.3 trillion) by the end of March, according to Zou, from 6.45 trillion yuan at the end of 2022.

The figures show just how much the PBOC has come to rely on the tools to deliver stimulus to the economy, instead of conventional measures, such as the PBOC's one-year policy loans. The latter stands at 5.1 trillion yuan, with the size of structural tools eclipsing that to make up roughly 16 per cent of the PBOC's overall assets now.

Back in the fourth quarter of 2022, structural tools supported a third of the net increase in total lending, according to estimates by Adam Wolfe, an emerging markets economist at Absolute Strategy Research. They were to maintaining credit growth, which stagnated last year as the economy slowed dramatically, he wrote in a report.

That's now changing, with corporate borrowing recovering rapidly after China dropped pandemic restrictions at the end of last year and swiftly reopened the country, fuelling consumption. Overall credit expansion exceeded market expectations for three straight months.

The economy's may see the PBOC rely less on unconventional policy measures going forward and shift its focus back to traditional tools – like its one-year policy loans or reserve requirement ratio for banks. In March, the central bank unexpectedly lowered the ratio, a move aimed at giving banks more cash to lend to customers.

A recent research paper led by Professor Huang Yiping, a former PBOC adviser, also throws doubt on the effectiveness of structural tools outside emergency times. The researchers argue that some of the tools had no significant or lasting impact on bank loans to small businesses.

“It's perhaps more suitable to use structural monetary policy during difficult times such as a financial crisis or the pandemic,” according to the paper published last week.

Many of the tools were created in order to alleviate the pandemic's damage on sectors such as logistics, manufacturing, private businesses' bond issuance and the delivery of housing projects. Eleven of the 15 programmes have been created since late 2021, according to statements of a breakdown published by the PBOC earlier this year.

Most of the central bank loans under these programmes have interest rates at around 1.75 per cent, lower than the one-year policy rate, which is currently at 2.75 per cent. The central government also subsidises interest payments for some of the loan programmes.

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