China signals stronger pro-growth policy stance

BEIJING - More signs pointing to stronger pro-growth monetary and fiscal policies have emerged after two days of meetings in Shanghai between financial ministers and central bankers of G20 economies, which concluded Saturday.

The growth-supportive policy stance was reinforced as the central bank announced on Monday it would lower the reserve requirement ratio (RRR) for commercial banks by 0.5 percentage points, the first such cut this year.

While central bank governor Zhou Xiaochuan shifted the tone on monetary policy from "prudent" to one of "easing bias," Finance Minister Lou Jiwei saw more room to further expand fiscal policy and predicted increased budget deficit this year.

The fresh signs come ahead of China's annual parliamentary session, which begins Saturday and will pin down economic targets and sketch out key economic policies for the world's second largest economy.

Prudent, with easing bias

The shift of tone on monetary policy, which has been characterized as "prudent" since 2011, brings policy language in line with reality, Bloomberg economist Tom Orlik wrote in a research note.

To arrest the economic downturn resulting from a painful transition to a more sustainable growth model, China has cut interest rates and the reserve requirement ratio of banks several times since 2014.

Qu Hongbing, HSBC chief China economist, said that the new description of monetary policy chimes with the ongoing easing of monetary conditions since last year.

The People's Bank of China (PBOC) injected more than 1.5 trillion yuan ($29 billion) into the market in January via open market operations, including medium-term lending facility and the standing lending facility, while also pledging supplementary lending operations.

For possible downside risks, China still has the space and tools for monetary easing, the central bank governor said on the sidelines of the meetings in Shanghai.

"Our interpretation is that there is still room and space for use of low-profile tools like the medium-term lending facility to guide loan costs down, and the need to avoid selling pressure on the yuan will make it more difficult to cut benchmark rates in the short term," Orlik noted.

The change in tone echoes policy guidelines set at China's economic work conference in December, which required the pro-active fiscal policy to be "more forceful" and the prudent monetary to be "more flexible."

"The PBOC has a broad enough toolkit to ease monetary conditions in a variety of ways," said Qu of HSBC in a research note.