Column by Tatyana Edovina about the activation of the People’s Bank of China

Last Saturday, the People’s Bank of China published the text of its report to the National People’s Congress for the first time. The document contains a detailed description of the regulator’s plans and is interesting because of the very fact of its publication – after the 2015 stock market crisis, the policy of the National Bank of China was aimed primarily at minimizing financial risks, and its representatives gave almost no comments on the state of the economy or the broader context. The fact that the NBK did not attract attention is understandable – the loan prime rate (LPR) has changed by less than a percentage point since 2016: for countries such as the Russian Federation or Turkey, a rate change of 20 basis points is difficult to understand event. Access to liquidity, however, is regulated by other instruments, but transactions between the NBK and state banks are not advertised, although they obviously influence the market.

After the Fed and ECB began tightening policies in the spring of 2022, the Chinese regulator found itself on the other side of the common reality for many countries in the form of higher inflation and higher rates – in China there is now deflation in producer prices and zero growth in consumer prices, lending rates are at historical minimum. The reason for this is the protracted fight against Covid (lockdowns were finally lifted only by December 2022), and weakening external demand against the backdrop of falling industrial output in Europe and a slowdown in consumption growth in the United States – as of September, Chinese exports are still showing a decline of 6.2% year to year.

The regulator promises to further reduce rates, including to mitigate the crisis in the real estate market. Here, the fight against overheating (which, we note, was caused, among other things, by restrictions on the export of capital and financial speculation) caused a too steady decline in investment, which has not yet been affected by small easing – sales in September were 20% lower than a year ago.

The NBK is also likely to play an important role in solving the key budget problem – the high and opaque debt burden of the regions. This is a consequence of the previous stimulation of the economy with infrastructure investments, but the regions’ problems are also related to construction – the traditional source of financing regional budgets was the sale of new land plots for construction, and last year these incomes began to fall sharply. Judging by a Reuters report, the Central Bank has already instructed state banks to soften the conditions for repaying regional debts, increasing the terms and lowering interest rates. Probably, the activation of the bank’s management and comments about the need to refocus on stimulating domestic demand are a declaration of intent to support the economy and solve internal problems – a significant improvement in the external situation is still not expected.