Is The PBoC Embarking On A New Tightening Cycle?

Rising Property Prices A Challenge For Monetary Policy

Rising property prices in China have increasingly become a challenge for monetary policy. The PBoC’s Q4 2016 Monetary Policy Implementation Report released last Friday, showed that “curbing asset bubbles” has now been added to the traditional tasks of China’s monetary policy such as stabilising economic growth, facilitating the adjustment of the economic structure and controlling financial risks. The report stated that, to address the relationship between asset bubbles, monetary policy, and macroprudential framework, that “the macroprudential framework alone, might not be able to curb asset bubbles.”

Monetary Policy Needs To Curb Asset Bubbles

The report also stated that there is a “need to utilize the twin pillars of monetary policy and macroprudential policy to curb asset price bubbles.” Specifically, the report highlighted the property bubble, pledging to control aggregate money and stem credit from moving into real estate speculation while still supporting reasonable housing demand.

The increase in money market rates, fueled by the PBoC’s OMO rate hike on February 23^rd, reflects the shift to a mild tightening stance in an effort to curb the property bubble and reduce financial risks. The hike was equivalent to a 10bp hike under the new policy regime, which is targeted more at the money market and OMOs.

Alongside attempting to curb the property bubble, this move could also help stem RMB depreciation expectations and therefore stabilise exchange rates which might be viewed as a show of friendship to the Trump administration in an effort to avoid a trade war.

Rising PPI No Concern To PBoC

Currently, rising PPI doesn’t appear to be a key concern for the PBoC. The report aligns the rise in PPI to demand factors such as real estate investment and infrastructure building as well as supply factors such as capacity reduction and inventory destocking.  The report also portrays rising PPI as a positive factor for economic growth and highlights that recent PPI increases have been influenced by upstream industries and therefore reflect imbalances in the industrial structure.