China Starts Talking Stimulus Exit Again as Economy Recovers

(Bloomberg) --

China’s central bank once again raised the topic of exiting its monetary easing policies, in sharp contrast to the U.S. and Europe, where a resurgence in virus cases has forced governments there to consider more stimulus.

Policy makers globally are discussing the timing of stimulus withdrawal, and the consensus is that it should be done sooner rather than later, Liu Guoqiang, vice governor of the People’s Bank of China, said Friday. “Exit is a matter of time and it is also necessary,” he said. “But the timing and method of exit need to be carefully evaluated, mainly based on the status of economic recovery.”

He added that the “international economy is recovering in general, and China’s overall situation is better than the international economy.”

China’s economy has regained all the losses made in the first half, with the recovery first driven by exports and industrial output and then strengthening as consumption picked up. That’s a rare positive for a global economy still clawing its way out of its worst slump since the Great Depression -- and which is now being complicated by the resurgence of Covid-19 cases in Europe and the U.S.

Read more: Xi Eyes Sub-5% Growth Rate in New Vision for Chinese Economy

“We have done some research recently, and we can see from the trend that our country’s economy is relatively strong, policies are having an effect, and market confidence is recovering,” Liu said in Beijing at a press conference with other financial officials. “But adjustments of policies shouldn’t be rushed, or weaken the effect of serving the real economy, nor can there be a policy cliff.”

Financial Risks

Liu didn’t provide any details as to the timing of a pullback in stimulus, while emphasizing that policy measures will be adjusted based on changing conditions and market demand. He said support will be further increased in areas that require long-term assistance.

The PBOC has taken a measured approach to monetary easing this year, lowering interest rates, injecting liquidity and giving businesses loan repayment holidays. Governor Yi Gang has previously told markets to start thinking about an exit from the looser financial policies.

Separately, the central bank also released its Financial Stability Report, which highlighted financial risks stemming from rising indebtedness.

Aside from the pandemic, “the default risks of some companies have increased, which may be transmitted to the financial system,” according to a statement accompanying the report. The central bank said it will seek to manage those risks, resolve gaps in regulation and prevent systemic financial threats.

The PBOC also discussed progress on its digital currency, saying:

• There is no timetable for the official launch of the digital yuan system
• It will continue to steadily advance the research and development of the digital yuan system, conduct pilot tests, and strengthen relevant research on policies and impact
• China will improve its fintech regulatory framework and introduce tools to regulate technology innovation

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