© 2018 by Robert Person.  The views expressed on this website are my own and do not represent the official policy of the U.S. Army, Department of Defense, or U.S. Government.

Apr 16

How China’s Central Bank Plans to Support Economic Growth

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On Monday, the People’s Bank of China’s (the PBOC) declared that China would pursue a stable monetary policy to better coordinate with their fiscal policy and other policies in order to sustain stable economic growth. The PBOC, in a statement made following a quarterly meeting, did not declare what specific structural adjustments have been enacted, but it did discuss its goals to maintain a prudent monetary policy and allow for higher liquidity in the interbank market. In the article, an ING economist, Iris Pang, stated that she expected tax cuts and extra spending on infrastructure to reach 4 trillion yuan or $596.45 billion by the end of 2019 (Reuters). This potential stimulus will most likely help revive the Chinese economy following its slow start earlier this year. Furthermore, the PBOC lowered banks’ reserve requirement ratio five separate times in the past year and is expected to continue easing its monetary policy in order to encourage further lending and reduce borrowing costs for small and private businesses. An upcoming benchmark for Beijing and the success of its latest policies is the first-quarter economic growth pace, which will be reported on Wednesday (Reuters).

 

This article applies to this block because the PBOC continues to adjust its fiscal and monetary policy in order to jump start economic growth in the country, but not with much success. For example, the PBOC lowered the reserve requirement ratio to promote more lending to small and private businesses. What lowering the reserve requirement means is that banks may keep less money in their savings, which will hopefully encourage people to take more loans and decrease the amount of money in the bank. Furthermore, they are expected to reduce borrowing costs, which means that they will most likely lower interest rates on loans. Lowering interest rates means that private businesses are more likely to take out loans to invest because it will not cost as much to pay the loans back, and therefore the money they invest from loans will result in economic output. However, as we discussed in class, the U.S. housing bubble in 2008 burst because people were borrowing money with extremely low interest rates from the bank and then they could not pay it back. Additionally, Beijing is cutting taxes in order to influence fiscal policy, which directly affects aggregate demand for goods and services. When governments cut taxes without reducing expenditures, aggregate demand for goods and services rises because consumers increase expenditures by some proportion of the tax reduction. This increase in expenditures might potentially increase the money supply, which would cause domestic interest rates to fall. This would result in a change in monetary policy, which affects the aggregate demand for goods and services indirectly. This expansionary monetary policy explains why the Chinese will lower interest rates; by increasing aggregate demand, output and employment will hopefully rise. A factor that might further affect monetary and fiscal policy is the current trade disputes between the United States and China, however how remains to be seen. By increasing domestic investment into the economy, China could potentially decrease the affects of international trade disputes.

 

This article may be found at: "China's central bank call for more policy coordination to support growth," Reuters, https://in.reuters.com/article/china-economy/china-central-bank-calls-for-more-policy-coordination-to-support-growth-idINKCN1RR0XG

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