Strong comments from China’s top state planner that the economy needed more support was most likely aimed at persuading the central bank to take bolder policy action.
For now though, the People’s Bank of China (PBOC) is unlikely to be swayed, worried cheaper credit has a greater chance of fueling asset bubbles and unwanted capital outflows than fresh investment.
The National Development and Reform Commission (NDRC) is one of China’s most powerful government bodies, with the authority to approve investment and regulate prices. It is responsible for making sure China meets its economic growth targets.
That mandate means the NDRC is sometimes at odds with the central bank, and over the past months that has been the case in an unusually public way.
The apparent differences point to the increasing challenges faced by Chinese policymakers as economic growth grinds lower and a debate being played out globally over the potency of easing monetary policy when it is already loose.
Staffers at the NDRC and PBOC declined to comment.
While China’s economy is on track to meet its 2016 target of achieving at least 6.5% GDP growth, it is behind on other goals. That prompted the NDRC to call for “arduous efforts” to make up lost ground.
China has set a longer-term goal of achieving average growth of 6.5% a year through 2020 to meet the aims of its latest five-year plan.
“It’s reasonable to say there’s still a lot policymakers need to do to reach their target,” said HSBC economist Julia Wang in Hong Kong. “It’s certainly not the time where they can afford to phase out any of the stimulus.”
But academics and analysts said the stimulus was unlikely to include easing monetary policy because the risks of doing so now outweigh the potential benefits. The PBOC also sees little reason to ease when companies are hoarding cash rather than spending it, suggesting cheaper credit would do little to spur fresh investment, sources have said.
Instead, the central bank has shifted to using newer policy tools that are more targeted and flexible, such as short and medium-term lending facilities, to manage market liquidity.
In money market operations, the PBOC recently shifted to using longer-tenor instruments to signal its concern about a potential bond market bubble, analysts said.
Easing monetary policy would “dampen China’s efforts to reduce overcapacity and squeeze out asset bubbles”, the official Xinhua news agency said in an editorial.
To be sure, it is common for different government departments in any country to have opposing opinions about policy, but in China those disagreements are rarely aired in public.
Investors have been watching China’s bureaucracy for signs of policy dissent since May, when the People’s Daily, the Communist Party’s official newspaper, quoted an “authoritative person” warning of a crisis if the government relied too much on debt-fuelled stimulus to spur the economy.
The report sparked speculation of a rift between China’s top economic policymakers and prompted a market selloff briefly as investors worried the easing cycle was coming to an end.
On Aug 3, the NDRC published a research report online saying China should lower interest rates and bank reserve ratios at an appropriate time – a rare public comment by the state group on monetary policy. The remark was deleted in an updated report later in the day.
The NDRC also pitted itself against the PBOC in 2010, arguing inflation would be benign when the central bank was saying rising prices posed a threat to the economy. The state planner later changed its rhetoric when inflation kept accelerating.
“We expect the Chinese government to be very coherent, but different departments are working from different mandates,” said ANZ Greater China Chief Economist Raymond Yeung in Hong Kong.
For the NDRC, there are some worrying signs about the economy’s performance.
Fixed-asset investment in July rose at the slowest pace in 16 years and below a 2016 target flagged by NDRC head Xu Shaoshi in March. It is forecast to have slowed again in August.
Retail sales are growing slower than the NDRC forecast and the pace of household income and consumption, key pillars of economic rebalancing, have also ebbed this year.
Fiscal stimulus has helped underpin the economy so far this year, but a reliance on infrastructure spending and a property market that is now showing signs of losing steam has stirred concerns about how to maintain longer-term growth.
GDP rose in 2015 at its slowest pace in 25 years and most economists expect it to slow again this year, so the voices calling for the central bank to cut rates or reserves will become louder.
“There is now rising pressure within China for the People’s Bank of China to further ease policy,” Chen Long, a Beijing-based analyst with Gavekal Dragonomics, wrote in an August note.
That could finally happen if economic expansion slows in 2017 and new growth drivers have not picked up the slack, analysts said.
“Various arguments (against easing) will hold less weight once the cyclical downturn in housing becomes more advanced, and growth and investment indicators take another step down, which is likely to happen around the end of 2016 or early 2017,” Chen wrote.
Gavekal doubts China can achieve its goal of average 6.5% GDP growth through 2020 and the IMF said recently the importance of growth targets should be downplayed and made more flexible.
“This growth target, from our perspective, it’s very likely to be a soft target going forward. So I don’t think there’s big pressure,” said ANZ’s Yeung