Neutral PBOC Sets Up First U.S.-China Tightening Since 2006

  • ‘We need to defuse a flurry of risks,’ official tells forum
  • 2017 growth estimates increase to 6.4% from 6.3% in September

China Emphasizes Prudent, Neutral Monetary Policy

China’s leaders are pledging a harder push to rein in risk next year and emphasizing prudent and neutral monetary policy. With the Federal Reserve flagging a steeper interest-rate path, that sets the scene for the first U.S.-China tightening since 2006.

President Xi Jinping and his top economic policy lieutenants adjourned their annual planning conference Friday with a vow to safeguard the financial system and deflate asset bubbles. Maintaining stability and making progress on supply-side reform will be key 2017 themes, they said in a statement issued after the three-day Central Economic Work Conference.

"Policy makers are making clear that they’re determined to clamp down on speculation and will keep doing so next year," said Wen Bin, chief research analyst at China Minsheng Banking Corp. in Beijing. "It’s very important to deflate the property bubble."

Focus is shifting to managing risks after this year’s expansion proved resilient, with Xi saying he’s confident in meeting the 6.5 percent to 7 percent growth objective. Economic challenges still loom ahead of a crucial party congress late next year, including potential trade tensions with U.S. President-elect Donald Trump.

‘Marginally Tighter’

"By emphasizing ‘neutral,’ monetary policy will be marginally tighter than 2016," Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc in Singapore, said of the statement released by cadres Friday. China has shifted to tightening, he said.

Still, a combined G-2 tightening is far from guaranteed. On the U.S. side, the Fed this year didn’t deliver on its projections for interest-rate increases. A stronger dollar or global events also could get in the way in 2017. And in China, monetary policy is undergoing an overhaul, meaning any tightening may be done via money markets rather than benchmark interest rates, which most economists forecast will be kept unchanged.

For a look at China’s changing monetary focus, click here

Official data Monday showed the overheated property market continued cooling last month as new-home prices gained from previous month in fewer cities. Beijing and Shanghai prices both snapped 20 straight months of gains, while Shenzhen, the hottest market earlier this year, saw the second straight month of declines in November.

China must deflate a property bubble that expanded this year by "strictly" controlling speculation and rein in excessive corporate borrowing, Yang Weimin, deputy director of the elite Communist Party financial and economic panel led by Xi, said at a forum Saturday.

Containing Bubbles

"We need to give a higher priority to preventing and controlling financial risk," Yang said. "We need to defuse a flurry of risks, contain asset bubbles, and improve oversight to ensure there won’t be a systemic financial risk."

Leaders said in their post-meeting statement that "houses are built to be inhabited, not for speculation." They want finance, land, taxation, investment and other instruments to be used "to establish a fundamental and long-term system to curb real-estate bubbles and market volatilities," according to a report by the official Xinhua News Agency.

Yang also noted "abnormal" corporate debt levels in recent years as the financial industry’s share of the economy rose rapidly while manufacturing’s declined. Deleveraging, especially in companies, must proceed to avoid hollowing out the real economy longer-term, said Yang, deputy director of the Office of the Central Leading Group on Finance and Economic Affairs.

Two years of PBOC easing has been accompanied by increased borrowing. Outstanding credit at year-end will be about 265 percent of gross domestic product, up from 247 percent a year earlier, Tom Orlik, chief Asia economist for Bloomberg Intelligence, wrote in a recent report.

Shadow Banking

Credit has been flowing freely. The broadest measure of new lending jumped last month by the most since March, boosted by borrowing for home loans and resurgent shadow banking.

Cadres use the annual conference to broker consensus on key issues for the following year. It includes Xi, members of the Communist Party’s Politburo, ministers, provincial governors, judicial officials and heads of state-owned enterprises. This gathering is especially crucial as it precedes the 19th party congress late next year, when new leaders will be elected.

Threats before that congress still loom, such as soaring debt and risk of confrontation with Trump over trade and Taiwan. Trump has threatened to impose tariffs on Chinese goods and to label it a currency manipulator after taking office Jan. 20.

Another is the Fed. State-run media commentaries Friday assured readers higher U.S. rates won’t roil China even amid capital outflows and a weakening yuan. "There’s no need to over-worry" because the economy is resilient, the People’s Daily said.

That didn’t calm markets last week. Chinese stocks capped their steepest weekly retreat since April, sovereign bonds posted the biggest weekly decline in two years, and the yuan tumbled to a fresh eight-year low against the dollar. The PBOC injected funds into the market basis using reverse-repurchase agreements for a third straight day on Friday.

Yet even as market wobble, the macro picture in China remains stable for now.

Ning Jizhe, chief of the National Bureau of Statistics, told the forum that 2016 targets for cutting excess steel and coal capacity have been met. In coastal regions, new industries and business models make up a big share of the economy, said Ning, who’s also deputy chairman of the National Development and Reform Commission, the top economic planning body.

Vice Finance Minister Zhu Guangyao said at the forum any trade war with the U.S. would be lose-lose, and China would turn to talks with the World Trade Organization should it happen. Zhu, who joined the financial and economic leading group this year, said the nations must move forward together, and cooperation between them is positive for the whole world.

— With assistance by Kevin Hamlin, and Miao Han

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