By+Zhou+Xiaoyan
In a recent monetary policy report， the Peoples Bank of China （PBC）， the countrys central bank， described for the first time the “new normal” of moderate growth in China—the economy has switched from highspeed growth to a deep-seated transformation of growth patterns.
Growth has moderated following the countrys rebalancing efforts while reform has unleashed much vitality to prop up economic development. Traditional growth drivers have weakened while newly emerging sectors are flourishing， read the China Monetary Policy Report for the Second Quarter of 2014， which was released by the central bank on august 1.
Experts say Chinas monetary policy should be adapted to the “new normal” of macroeconomic conditions. looking ahead， the central bank insisted on “maintaining a stable money supply while optimizing the lending structure.”
Policy focus
Ma Jun， chief economist with the Research Bureau of the PBC， said the central bank should improve its adaptability to the slow- ing economy. First， it should make sure whether or not there is enough potential in growth momentum so as to avoid overuse of stimulus measures. It should also decide whether it wants to maintain GDP growth or employment rates. Finally， if the economy cant be completely weaned off stimulus， the central bank should seek to avoid or mitigate the many potential negative after-effects brought about by the stimulus， such as overly high leverage ratios and overcapacity， he said.
“In the long run， the central banks regulation target should be shifted from maintaining GDP growth rate to ensuring a stable job market，” said Ma.
lian Ping， chief economist with the Bank of Communications， said maintaining growth， managing risks and adjusting deflation in the manufacturing sector should be the most important targets of Chinas monetary policy.
“at present， the Chinese economy has entered a ‘new-normal stage， featuring stable and moderate growth， low inflation and a healthy job market，” lian said.
“The central bank used to fine-tune its total money supply. In the future， it will be less likely to adjust the total supply and will instead focus on targeted adjustment of certain sectors to support Chinas restructuring efforts，” lian said.
Wen Bin， a researcher with Minsheng Securities， told China Business News that Chinas monetary policy is confronted with three challenges.
“In the short run， it needs to maintain stable growth by stimulating total demand. In the midterm， it needs to cope with new challenges engendered by decreasing funds outstanding for foreign exchange transactions. In the long run， it needs to create a monetary regulation system based on price after market-based interest rate reform is completely carried out in China，” Wen said.endprint
“Due to these challenges， the central bank has to combine short-term regulation with longterm reforms，” Wen said.
a report from China International Capital Corp. ltd. （CICC） said it would be almost impossible for the central bank to loosen monetary supply in the coming months.
as of the end of June， M2， a broad measure of money supply that covers cash in circulation and all deposits， reached 121 trillion yuan（$20 trillion）， up 14.7 percent year on year. New yuan-denominated loans amounted to 5.7 trillion yuan （$930 billion）， 659 billion yuan （$107 billion） more than the same period last year， according to the central bank.
“In the first-quarter monetary policy report， the central bank said lending and total social financing enjoyed a reasonable and stable increase while total money supply slightly edged down. But in the second-quarter report， it said lending and total social financing have increased relatively fast while total money supply has rebounded substantially. This change in phrasing shows that the central bank thinks theres enough liquidity in the market，” said CICC in its report.
“But the central bank also promised to lower financing costs， which means its unlikely to tighten money supply，” the report stated.
More targeted easing？
To further encourage financial institutions to lend to agriculture-related sectors and small and micro businesses， the central bank carried out targeted easing twice this year， in april and in June， respectively.
Targeted easing has paid off， according to the report. New loans to agriculture-related sectors and small and micro businesses have exceeded loans that flow to other sectors in the second quarter.
Wen， the researcher with Minsheng Securities， said the focus of monetary policy should be reducing financing costs in society， especially for agriculture-related businesses and small and micro businesses.
“On the one hand， the central bank should use instruments—including repo， reverse repo， short-term liquidity operation and standing lending facility—to maintain stable interest rates in the money market，” Wen said. “On the other， targeted easing and favorable lending policies should be used to guide funds to the weak links in the Chinese economy.”
But the central bank also said in the quarterly report that monetary policies are mainly for controlling the total money supply， while changing the lending structure only plays a supporting role.endprint
“If carried out over a long period of time， targeted easing will create a number of problems， such as compromising the authenticity of data， undermining the markets role in determining money flow and influencing the effects of reserve requirement instruments，” the central bank warned in the report.
“In the long run， the pickup in growth momentum， the transformation of growth patterns and the optimization of lending structure should be achieved by comprehensive reforms， in which the market should play a decisive role in allocating resources，”said the central bank report.
Guan Qingyou， assistant Dean of Minsheng Securities Research Institute， said targeted easing is only curing the symptoms， not the disease， when it comes to lowering financing costs for businesses.
The obvious question， then， is how exactly should China cure the disease？
“Radical solutions to the problem include cutting funding for industries with excess capacity， accelerating reforms of state-owned enterprises and stripping banks of bad assets. Mild measures include slowly deleveraging the broad economy， reducing inefficient investment and refraining from injecting liquidity whenever the economy shows any sign of slowdown，” Guan said.
“Targeted easing for weak links of the economy is needed but will create serious repercussions，” Guan warned.
“Monetary regulation cant replace reform，” said Guan. “Reform， on the other hand， requires the concerted efforts of all parties concerned. The central bank cant do the entire job by itself.”endprint
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