China’s economy has been on the rebound since the start of the COVID-19 pandemic, and it is expected to maintain an accommodative monetary stance to support further economic growth. While the US is poised to raise interest rates as a result of higher-than-expected inflation data, experts predict that China’s mild domestic inflation and the growing appeal of renminbi-denominated assets will provide ample room for maneuvering.
Robin Xing, Morgan Stanley’s chief China economist, expects China’s monetary policy to remain relatively accommodative throughout this year to ensure steady economic growth. The country’s economy has been steadily recovering, and normalized production activity in China can help global supply chains function more effectively.
Furthermore, the country is not expected to see inflationary pressure. China is not likely to stimulate its economy through infrastructure spending that could cause commodity prices to increase, and there is a sufficient labor force to revive service consumption without putting too much pressure on inflation.
According to Xing, “the rebound of China’s economy is likely to cool global inflation instead of pushing it up.” In January, China’s consumer price index remained mild at 2.1 percent year-on-year, while the US reported CPI growth of 6.4 percent year-on-year. Despite the slower-than-expected ease in US inflation, experts predict that the Federal Reserve might further raise interest rates by 50 basis points this year to a range of between 5 and 5.25 percent, which could widen the US-China interest rate differential in the short term.
Despite the Federal Reserve’s tightening of monetary policy, China’s central bank, the People’s Bank of China (PBOC), has ample room to support the real economy, with room remaining for reducing interest rates. The PBOC injected a net 199 billion yuan ($29 billion) in liquidity via its medium-term lending facility operation on Wednesday, marking the third consecutive month of net injection. Moreover, the central bank will further strengthen financial support for domestic demand and industrial systems and has vowed to expand the use of an instrument to support private companies’ bond financing.
As China’s economy steadily recovers, renminbi-denominated assets have become increasingly appealing to global investors. According to data from the State Administration of Foreign Exchange, foreign investors bought a net $27.7 billion worth of onshore stocks in January, marking the highest single-month reading on record. Tang Yao, an associate professor of applied economics at Peking University’s Guanghua School of Management, stated that January’s higher-than-expected US inflation should have a limited impact on China, as the Federal Reserve is likely to stick to its announced path of interest rate hikes.
Xing at Morgan Stanley said China’s monetary support is expected to feature structural aids to key areas such as the manufacturing sector and green development. Room remains for reducing interest rates of outstanding mortgages to stabilize the property market. He also added that the country may set a target of around 3 percent for consumer inflation in 2023.
In conclusion, China’s monetary policy is expected to remain supportive to ensure steady economic recovery from COVID-19. While the US is tightening its monetary policy, China’s mild domestic inflation and the growing appeal of renminbi-denominated assets are expected to provide ample room for maneuvering. The country’s central bank will continue to support the real economy, with room remaining for reducing interest rates. As China’s economy steadily recovers, it is expected to attract more foreign investment, thereby offsetting the pressure of capital outflow caused by the US-China interest rate differential.