PBOC Governor Signals Policy Caution With Focus on Inflation

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China’s central bank governor stressed the importance of keeping inflation under control in two separate speeches released Friday and pledged more targeted support for small businesses, reinforcing policy makers’ cautious approach to monetary stimulus. 

The People’s Bank of China’s “policy is to maintain price stability,” Governor Yi Gang said on a panel at the Boao Forum for Asia. In separate comments delivered at a meeting of the International Monetary and Financial Committee, he emphasized that “China’s monetary policy’s primary objectives are stable prices and stable employment.”

Monetary policy is in a “comfortable range” and is helping to support the economy, the governor said at the Boao forum, refraining from mentioning more broader steps it could take, like cutting interest rates or giving banks a cash boost. Instead, he highlighted the structural policies the PBOC has introduced to boost weaker sectors in the economy, such as small businesses.

“We also stand ready to support small and medium enterprises with more instruments if needed,” he said. 

The comments reflect the PBOC’s moderate approach to monetary easing despite calls for stronger action to cushion the economy against worsening Covid outbreaks and stringent lockdowns to control infections. Investors have been disappointed by Beijing’s lack of stimulus so far, with stock markets tumbling in recent weeks.  

“Based on the speech today, the possibility of large-scale easing is very low, and the policy remains very cautious,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. The PBOC “seems relatively satisfied” with its support to the real economy, he said.

The benchmark CSI 300 Index erased losses of 1.1% in early trading and edged up 0.3% by 1:32 p.m. local time. The yield on 10-year government bonds rose slightly to 2.835%.

The PBOC refrained from cutting policy interest rates last week and lowered the reserve requirement ratio for banks by a smaller-than-expected margin. The Federal Reserve’s rate hikes are adding another complication, restricting the PBOC’s policy room as foreign investors begin to pull funds out of Chinese assets, putting pressure on the yuan.

Yi stressed that monetary policy is working in tandem with fiscal policy to boost the economy. Referring to the PBOC’s planned transfer of 1 trillion yuan ($155 billion) of profit to the central government, he said the funds will mainly be used for value-added tax refunds and budget transfers to local governments.

“This is a good example of a combination of an accommodative monetary policy and proactive fiscal policy,” he said.

Inflation Risks

While consumer inflation has been relatively subdued, risks are starting to rise because of soaring commodity prices and Covid-related disruptions to supply chains. 

Yi acknowledged that geopolitical conflicts -- referring to the Ukraine war -- have pushed up global inflation, and the domestic financial market is not immune to external shocks. The spread of Covid within China has also put more downward pressures on the domestic economy, he said.

The PBOC is focusing on grain and energy to ensure stable prices this year, according to Yi. “We are going to have a stable grain production and energy supply this year,” he said. “That will ensure our inflation would be in a reasonable range.”

Inflation risks dominated the discussion on the Boao panel, which included speakers like Agustin Carstens, general manager of the Bank for International Settlements, and Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore. 

Carstens said global inflationary pressures are unlikely to ease soon, and central bankers should adjust their approach to this new environment. 

“Policy makers may need to shift their mindsets,” he said. “The low inflation environment gave central banks great, if not unprecedented, leeway to place more weight on other objectives, be they growth, full employment or others, further beyond their traditional remit.” 

In the speech to the International Monetary and Financial Committee late Thursday, Yi said the PBOC has ensured market interest rates are within a reasonable range and that money supply matches the pace of nominal economic growth.

The governor said small businesses account for 80% of jobs in China, according to a transcript published by the central bank. The PBOC will step up financing support to smaller firms to ensure stable employment, he said. 

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With assistance from Bloomberg