Download Monetary Policy in China Coping With the Global Financial Crisis

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Monetary Policy in China Coping With the Global Financial Crisis
FANG Fang
School of Economics, Renmin University of China, 100872
[email protected]
Abstract: Due to the global financial crisis China shift the macroeconomic policy from the
appropriately stringent monetary policy aimed at checking inflation to prudent monetary policy to
expand domestic demand. We analyze the effect of 2009 monetary policy and outline some shortcoming
of the policy.
Keywords: Monetary Policy, Global financial crisis, Economic growth
1 Introduction
The financial crisis which swept the globe had been continuing to spread at the beginning of 2009, the
risk of economic downturn that China was facing was growing. The country had been beginning fully
putting place of a basket of stimulation plan by the end of 2008, implementing the anti-crisis policies of
“expansion of domestic demand, maintain growth, adjustment of structure and benefits the people’s
livelihood”. The strategy of macro regulation and control has also been changed greatly to stop china’s
economy sliding. Of all those policies, the monetary policy being a crucial role player in china’s
recovery process had been a most brilliant highlight in the whole year.
The paper is organized as follows: Section 2 introduce the 2009 monetary policy. In section 3,we
analyze the effect of monetary policy to economic growth. Then we outlines the shortcoming of 2009
monetary policy in section 4.
2 The Contents of 2009 Monetary Policy
Since the government declared major fiscal and monetary policies adjustment which was shifted from
prudent fiscal and tight monetary policies to proactive fiscal and moderately relaxed monetary policies
on November 9th 2008, the moderately relaxed monetary policy had been a keynote for monetary policy
making by the People’s Bank of China who was exerting flexible and vigorous measures to increase the
financial support to economic growth. From emphasizing the “relaxing” at the first half of the year, to
the “moderate” at the second half, and to the “maintaining the continuity and stability of the monetary
policy, putting forth effort to improve the pertinence and flexibility of the policies” by the end of the
year, the policy means and stresses had also been adjusted with the changing of the whole economic
situation and the execution of the policy itself.
2.1 Money Supply
Table1 Money Supply at Different Levels
Currency Unit: RMB 100 million
2008-09
2008-12
2009-03
2009-06
2009-09
2009-12
452898.7
475166.6
530626.7
568916.2
585405.3
606225.0
M2
155749.0
166217.1
176541.7
193138.2
201708.1
220001.5
M1
31724.9
34219.0
33746.4
33641.0
36787.9
38246.0
M0
Source: the website of People’s Bank of China http://www.pbc.gov.cn
From the table above we can see, due to the rapid increase of loans issued, the quarterly money supply
balances for each level showed with progressive increases. At the end of 2009, the broad money supply
M2 was RMB 60.6 trillion Yuan, up by 27.7% on year on year basis, its acceleration rate was 10.0%
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higher than the year before. The balance of the narrow sense money supply M1 was RMB 22.0 trillion, a
32.4% increase on year on year basis, and its acceleration was 23.3%. The currency in circulation M0
was RMB 3.8 trillion, an increase of 11.8% on year on year basis, and its acceleration was 0.9%. The net
cash issued was RMB 402.7 billion, 7.1 billion less on year on year basis. The money multiplier was
4.11 by the end of the year, 0.53 lesser than the peak in the end of August, but 0.43 higher than the
number in the end of the first half; the money expansion capacity was generally strong. The increase of
money supply visibly resulted in the lifting of economic activities, and shows the effect of the expansive
economic stimulation policies.
When observing from layers, the supply of M0 was stable, and M1 and M2 soared sharply, the scissor
differences between the 2 were narrowing. See the following figure 1:
Figure1 Increase Rate of Money Supply at Different Levels
Source: sort out from the money supply data of the People's Bank of China
The rapid increases of M1 and M2 show that the relaxed monetary policy was mainly realized by
lending, showing the relief of low liquidity by the relaxed monetary policy. Specifically, the faster of
speed increase of M1 than M2 reflects the increased profitability for enterprises and the refueling to
incentive of investment and the pouring of liquidity into the real economy, is a good sign of increasing
vitality of the economy body, and shows the initial effect of the stimulation plan. However, the gap
between the M2 and GDP had reached to historical point, and the 4 trillion investment program was
fully reflected through the monetary policy, this also produced an inflation expectation.
2.2 The Newly Issued Loans
The loan quantity is a direct mark of tight/easy degree of a monetary policy. The amount of the 2009
issued RMB loans was RMB 9.59 trillion, an increase of 4.69 trillion on year on year basis. So huge the
loans issued were, it is unprecedented.
Observing the chart of the tremendously high amount of the RMB 9.59 trillion by season, the credits
were mainly issued in the first half of the year with an amount of 7.37 trillion, and there were 4 months
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that lending even surpassed 1 trillion in the first half; however in the second half the lending as a whole
was back to rationality, this also reflects the monetary policy trends of “relaxing” in the first half and
“moderate” in the second. On the one hand, this shows the effect of lending inertia and operational
philosophy, on the other hand the most important is the effect of the changing economic situation. At the
beginning of the year the economic crisis was spread continuously, and the global economies adopted
unusual means of easing liquidity to stimulate economies. Our country was also facing a great risk of
sliding, and the relaxed monetary policy was exerted to its utmost to rapidly supply the money like
water blow-out, and make the liquidity in banks abundant. The easy money of the relaxed monetary
policy was effectively infused to economy in the first half; however, the economic structural and
inflation problems were looming and needed to be concerned. The central bank’s monetary policy in the
third and fourth season in many ways reflects the thinking of “fine tune”, so the lending was back to
rationality, and acceleration was going down.
In the aspect of loan investing direction, in order to support the government’s proactive fiscal policy that
put in place the RMB 4 trillion economic stimulation plan, the banks credit were mainly infused to the
relatively longer term infrastructural construction programs , the rental and business services, real estate
and manufacturing industries, etc. The growth of the consumption loans was in acceleration and the
personal loans were expanded to 1.80 trillion, 1.30 trillion more than the same period of the year before.
There were 75% of the newly issued personal loans for residual housing, which is classified as housing
consumption.
In the aspect of the structure of loan terms, the medium and long term loans were weighted up
continuously, and the notes financing were ups and downs. It shows in the Figure 2:
Figure 2 the Structure of Loans for Each Month in 2009
First, in order to coordinate the government’s proactive fiscal policy that put in place of RMB 4 trillion
economic stimulation program, the bank credits were mainly infused to the relatively longer term
infrastructure construction items, and resulted in the medium and long term loans weighted up in overall
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lending balance to a new high compared with the same historical periods. The central bank’s data show
that over 50% of the newly increased loans were invested in transportation facilities, power and
environment that are related to governmental policies. Additionally, after the discount notes are due,
commercial banks flooded to replace them with medium and long term loans. So, although under the
situation of relatively going down of the total newly issued loans, the weight of the medium and long
term loans were still lifted up. Second, the weight of notes financing changed radically. At the beginning
of 2009, due to the extreme market liquidity that the relaxed monetary policy led to, plus the incentives
for banks avoiding risks, the notes financing grew rapidly, the short term loan realized by notes
financing was obviously visible; however, in the second half, the weight of this type of loans went down
rapidly, it actually was in volatile in the whole year.
2.3 Open Market Operation
In 2009, the central bank accumulatively issued the central bank bills RMB 4 trillion, and buy-back
operation was 4.2 trillion. In the first half it operated mainly on 3 months short term notes, since the
beginning of July it resumed the issuing of 1 year central bank notes, appropriately extending the time of
freezing liquidity. At the same time, it flexibly adjusted the structure of the terms of buy-back operation
(short term, within 3 months), complementary with other central bank notes in terms of term. The
central bank appropriately raised the interest elasticity in open market operations, bringing into play of
the market interest for controlling the money supply. In the first half the central bank kept the open
Markey interest rate generally stable, and due to further confirmation of the recovery of the economy in
the second half, the rates of the 28 days buy-back and 3 months central bank notes were adjusted to
1.18% and 1.3280% by the end of the year 2009, 28 and 36 basis points up than the beginning of the
year respectively; the issuing interest rate of the 1 year central bank notes was 1.7605%, accumulatively
up 26 basis points since the restarting of the operation.
As to the problems brought by the rapid issuing of loans in the first 3 seasons, as well as the increased
liquidity brought by the RMB counterpart of foreign exchange reserves due to the pickup of surrounding
environment and the improvement of export and attraction of foreign investments, the central bank
intensified the frequency of open market operation in the 3rd season, gradually shifting to net inward
capital from the small net outward issuing. The more frequent open market operation was a new change
of monetary policy in the fourth season. By the end of the last week of 2009, the central bank
continuously withdrew currency from circulation for a net of 844 billion for a successive 12 weeks,
showing it adopting the “fine tune” means for the bank’s monetary policy.
The relaxed monetary policy in 2009 adopted more the quantity tool rather than the price tool.
3 The Effect of the Monetary Policy
According to Keynes’s macro-economic theory, the monetary policy has an asymmetry effect, that is,
when in recession, the effect of proactive fiscal policy is much better than the monetary policy’s, the role
of the former shows in the multiplier effects which is with powerful leveraging; while the latter
functions through an easy crediting to offer funds for programs supported by fiscal policy, therefore, the
former is a tool that is primarily ranked, while the latter plays a coordinated role. However, in the case
that the economy was obviously “boosted by policy” in China, the multiplying effect of fiscal policy is
not that big, and can’t be followed by chain-like private investments; therefore no doubt, the role of
monetary policy was lifted to an important position, the realized result which its goal was set before the
policy adjustment also reflects the effect of policy.
3.1 “V”-shaped turning for economic growth, meeting the goal of “8% insurance”
The 2009 national GDP reaches to RMB33.5353 trillion, accounted by comparable price, it’s 8.7% more
than the year before; the country had successfully accomplished its goal. Breaking down by quarter,
growth rate in the first quarter was 6.2%, the second quarter was 7.9%, the third was 9.1%, and the
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fourth was 10.7%. When breaking down by industry, the primary industry GDP was RMB 3.5477
trillion with an increase by 4.2%, the secondary industry was RMB 15.6958 trillion with a growth rate
of 9.5%, and the tertiary industry was RMB 14.2918 trillion with a growth rate of 8.9%. This shows that
China’s economy had been relatively faster to reverse the sliding down trend and realized the “V" shape
reversion coming out of the country resolutely put place of a basket of economic stimulation plans
including moderately easy monetary policy, and made remarkable result in maintaining growth. Under
the background of the global financial crisis and great shrinking of exports, China's huge credit loan
issued this year has significantly meaning for its economic goal of maintaining 8% growth, its relaxed
monetary policy caused neither the phenomenon of reluctant loaning and tightening debt, nor the
phenomenon of breakdown of fund-chain for enterprises that had taken place in Asia Financial Crisis,
but powerfully supported the economy’s rebound which were out of expectation.
Figure 3 Quarterly GDP Growth
3.2 Expansion of domestic demand, consumption grows reversely
With the fact of less contribution to economic growth from the 2009 export, the main force that pull out
the country's economy from the most difficult periods and lead to recovery was from the push of the
domestic demand, that is, when breaking down, the push with investment demand was 7.3%, with
consumer demand was 4%, and with export demand was -3.6%. ①From the structure of the domestic
demand we can see, the investment increase rate was going up highly, and made obviously greater
contribution to the economic growth.
Total investment in fixed assets in 2008 was up by 25.5%, a real increase of 15.2% when price factor
was taken into consideration; it is predicted that the total investment in fixed assets in 2009 would
① Source: Sort out from the bulletin of the State Statistics Bureau
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increase by 33%, a real increase would be 41% when price factor is taken into consideration; therefore
the real growth rate of investment would reach by 25%. The consumption growth was stable and trended
to be flourishing and prosper, increasing its contribution to economic growth. From the contribution rate
of investment and consumption in 2009 we can see, the investment contribution rate was up to 94.8% in
the third season from 33% in the first season; however the consumption contribution rate was down to
53.4% from 70%.①
The comeback of confidence from economic body, together with the accelerated increase of domestic
demand, had offset the decrease of foreign demand and led the total demand with a 14% growth,
supporting the economy an over 8% growth. This to a big degree is determined by implementing the
macro economic policy adjustment, so that the economy correspondingly made the achievement. In the
aspect of investment demand, there is no phenomenon of reluctant lending and tightening debt in the
relaxed monetary policy environment, it vigorously supporting the economy's out-of-expectation
rebound. In consumption demand aspect, the country increased its support for personal loans, and the
personal consumption loans have increased visibly. For the whole year of 2009, the total personal
consumption RMB loans of financial institutions was increased to RMB 1.8 trillion, the year-end
balance was 48.6% than the year before, its increase rate was 34.6% on year basis. Of which, the
personal housing mortgage loans for housing was increased by RMB 1.4 trillion, its year-end balance
was up by 47.9% on year on year basis, and acceleration rate is 37.4%.
4 The Shortcoming of the 2009 Monetary Policy
The 2009 monetary policy has been changed fundamentally comparing with its predecessors. Generally,
it took relaxing as its policy direction, and coupled with fiscal policy forming a “double relaxing” policy
stance. However, while the relaxing monetary policy achieved remarkably in terms of maintaining
growth and expansion of domestic demand, it also exposes some problems, mainly shows as follows:
First, the huge issuance of credit in the year shows a sign of excess liquidity and expectation of inflation.
Under the flag of “anti-crisis”, although the lending in the second half of 2009 was turning back to
rationality, the newly increased loans reached to tremendously high amount of RMB 9.59 trillion, and so
on the money supply which went side by side with the lending experienced a big stride, and the market
liquidity increased rapidly. The historical experiences and relevant data show the effect of excess money
lending will have a period delaying; it’s quite easy to transfer it to prices and lead to inflation. The
expectation of future price index in the fourth season reached to 73.4%, it‘s in the fourth concessive
growth. Meanwhile, the asset prices were also in increase, in December, the house sales price in the
country’s 70 large and medium sized cities increased by 7.8%, the increase rate was 2.1% more than that
in November. The average price of national commercial residential houses in 2009 was 20.8% even
higher than the peak in 2007; this not only resulted in possibility of diverting credit capital from
supporting the real economy, but likely caused bubbles even inducing foreign hot money coming into
the country, risking the economy.
Second, there is need to optimize the lending structure. The imbalance of structure shows as following
aspects: (1) in the round of stimulating investments, it is basically the governmental capital driving
credit capital into investment, private capital was not that active; (2) although the government
continuously emphasized to support medium and small enterprises, this kind of entities can only get
limited credit, and a ceil is set for the role of monetary policy to play for promoting employment; (3)
when analyzing it through industries, it was more focused on traditional industries like manufacturing
and communication and transportation and real estate etc, lesser on agricultural, service, and newly
emergent industries.
Third, the rapid growth of credit lending caused banks facing more risks. First is from operational risk.
In the process of rapid credit growth, the competition between banks for getting loan projects might lead
① Source: the 2009 Statistic Report for the Loans Direction of Financial Institutions by the PBC
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banks intensively lower their lending conditions, simplify lending procedure, and loosen their review on
loans; in such short time issuing such huge loans, it’s difficult for banks to investigate the lender’s
thorough information so that comes asymmetry of information, plus, with the potential factor of poor
enforcement by staffs, the possibility of loss would be potentially great. Second, the risks come from the
structures of depositing and lending money terms. With the upward of the economic activities, the trend
of deposit switching to current account becomes remarkable. By the end of November, the current
deposit weighted up 38.27% in all deposits. Comparing to the medium and long term loans which
occupy nearly half of lending, the structural problem of “long term lending geared with short term
depositing” once again emerges. Although the deposit switching to current account may lower down the
capital cost for banks, it requires higher standard for banks to manage its sustainability, and to some
degree it adds managing risks.
5 Conclusion
Easier monetary policy is one of the most important measure China took in response to the global
financial crisis and grim international economic environment. To some extent, the monetary policy has
succeeded. But the policy also had some negative effect. For 2010, the monetary policy is still facing a
rather complex situation, and the prospects of the international economies are still unclear, whether the
domestic economy can maintain a rapid growth is still facing uncertainty, so, the relaxed monetary
policy should add its capacities of outlook, pertinence, and flexibility.
Acknowledgment:
The dissertation is completed with the support of “Innovation Center of Philosophical and Social
Science Studies on Chinese Economy”, a “985” project of Renmin University of China.
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