Free to read: Fiscal Spending And Monetary Easing Key to Stabilizing China’s Economy, Says Expert
Ultimate aim of adjusting monetary policy is economic stability in the short term, says leading economist
A major concern in easing monetary policies is the effect on China’s currency, especially with high U.S. interest rates.
Easing monetary policy while increasing fiscal spending could alleviate the economic pressures currently affecting China, said Huang Yiping, dean of the National School of Development at Peking University.
The monetary policy of the People’s Bank of China is central to addressing these macroeconomic challenges, particularly in the face of rising interest rate pressures and a slowing economy, he said speaking at a seminar at Peking University Monday. And the bank’s ultimate goal when adjusting monetary policy is to stabilize the economy in the short term.
“Structural reforms are vital for long-term growth, but we should not dismiss the immediate importance of cyclical policies,” he said, noting that businesses are struggling with a lack of orders, dampening overall optimism. He emphasized that if policies could stimulate demand, companies would generate more orders, leading to higher production, job creation and wage growth.
Huang argued that while structural reforms are necessary, cyclical interventions can address immediate economic concerns by temporarily boosting consumer demand. “Without cyclical policies, long-term growth becomes harder to achieve if the short term fails,” he said, stressing that policies must address the short-term demand gap to pave the way for future stability.
A major concern in applying such monetary policies is the effect on China’s currency, especially when U.S. interest rates are high. However, Huang pointed out that there is broad market consensus that the Federal Reserve will begin cutting rates in September, easing some of the pressure on China.
Despite concerns about narrowing net interest margins in China’s banking sector, Huang insisted that the central bank’s path of gradual rate cuts remains clear, aiming to stimulate the economy by increasing liquidity.
Net interest margin, a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders, has reached historical lows in China, at 1.54% as of the second quarter of 2024, and rate cuts could further erode banks’ profits. However, Huang cited Japan’s experience, where despite low margins during the period of zero-interest rates, banks have maintained profitability. This example, he said, shows that concerns about narrowing margins should not prevent necessary monetary easing in China.
Huang also addressed the complementary role fiscal policy could play in stabilizing the economy. While monetary easing can help, he suggested fiscal policy may offer more direct support. He highlighted that while liquidity in the banking system is currently high, demand for credit remains low, further suggesting that fiscal measures might be more effective at this point.
In this context, the central bank’s ability to complement fiscal policy, particularly through government bond transactions, can provide additional support to ensure financial markets remain stable during this period of economic uncertainty, Huang said.