A recent report makes clear that the central bank has chosen to sacrifice China’s immediate monetary needs to support Xi Jinping’s goals.
For some time now, the People’s Bank of China (PBOC) has straddled the fence on conflicting policy demands.
On the one side, tariff pressures and China’s soft economy have called for lower interest rates to encourage domestic spending and weaken the yuan as an offset to the ill effects of tariffs on exports. On the other side, Beijing’s ambitions to internationalize China’s currency and ultimately challenge the U.S. dollar’s status as the primary international currency—which bankers and economists refer to as the global reserve—call for monetary policies that would strengthen the exchange value of the yuan. For a long while, the PBOC has tried to square this circle, cutting interest rates to help the economy but only minimally so as not to interfere with efforts to raise the yuan’s international profile.
A recent PBOC quarterly report clearly shows that the bank’s managers have declared their support for Beijing’s ambition to challenge the dollar. The bank has stated that it no longer sees a need to reduce interest rates. It declares that policy is already “moderately loose” and sufficient to support an economic picture that it describes as “steady.” The bank further makes its case by downplaying the recent slowdown in the growth of new loans. Though a drop in loan growth is a classic sign of economic softening, the report, without much explanation, claims that it is tolerable and makes no call to action.
As a further indication of new policy directions, the bank’s report has abandoned previous statements about the need to “strengthen countercyclical adjustments,” in other words, take steps to reverse the economy’s slowing. Now, the report speaks of a need to balance “both counter-cyclical and cross-counter-cyclical adjustments,” in other words, neither stimulate nor retard the economy. Given how little the bank has cut interest rates to date, the persistence of China’s property crisis, and the failure of policies so far to revive consumer spending, all these claims contradict available evidence or the economy’s needs.
This posture in the face of China’s clear economic needs stands as a powerful signal that the bank, at the very least, leans toward supporting Chinese leader Xi’s ambitious project. It has offered confirmation of that leaning by pegging its daily yuan exchange target at higher levels than previously. Reinforcing this position is language in the report that emphasizes steps to improve the “monetary transition” and build a “macroprudential management framework.” In plain language, these statements effectively ignore immediate economic and financial needs and instead focus on the construction of systems to develop operational capabilities to support the yuan as a rival to the U.S. dollar.
