People’s Bank of China’s (PBOC) Governor Yi Gang. (Photographer: SeongJoon Cho/Bloomberg)

PBOC's Yi Says Monetary Policy Will Keep Supporting Economy

(Bloomberg) -- China’s economy is facing increasing downward pressure, and monetary policy will continue to be supportive, People’s Bank of China Governor Yi Gang said Thursday.

The pressure comes as the nation shifts from high-speed growth to high-quality growth, according to Yi. “China won’t have double-digit growth like in the past years,” and it’s stayed around its potential growth rate in recent years, he said.

PBOC's Yi Says Monetary Policy Will Keep Supporting Economy

Policy has been challenged by external shocks such as trade friction and other market turbulence, Yi said in a speech at Tsinghua University in Beijing, saying that the contraction in shadow banking has contributed to slower infrastructure investment.

Yi’s comments came hours after the Communist Party’s Politburo signaled that it will continue with its campaign to curb financial risk into 2019 while pursuing high-quality growth. The economy faces an uncertain few months, with the trade war with the U.S. as yet unresolved and earlier stimulus measures still not showing much impact.

“When we adjust monetary policy, we have paid special attention to market liquidity,” Yi said, adding while benchmark interest rates remained unchanged, the 7-day repo rate has declined in the second half and helped with solving financing difficulty.

Market Guidance

As the PBOC manages to tackle external shocks, it would also “strengthen expectation guidance and pay special attention to risk contagion across markets,” he said. The nation’s macro leverage ratio has been stable for the past eight quarters at about 250 percent of gross domestic product, according to Yi.

When addressing high leverage ratio, policy makers’ best strategy is to "let the pressure out slowly" -- although timely actions are needed by the central bank to stabilize financial market and restore public confidence, if external shocks hit, he said.

Turning to the U.S., he said in a question-and-answer session after the speech that a "constructive solution" to the trade tensions is beneficial to both nations, as the two share big economic interests in common. He also said that the Federal Reserve “is more unpredictable" in the rate hike cycle now than several months ago.

Shadow Banking

Shadow banking "isn’t entirely a negative word" and can be a necessary supplement to financial markets, Yi said.

"It can be an effective part of the financial markets as long as the operation is legitimate," according to Yi.

A key economic policy meeting is scheduled for next week, according to people familiar with the plan, which should sketch out the policy priorities for 2019.

The Politburo also hinted that market-oriented reforms could be a priority for 2019, which could appease U.S. critics who’ve focused on China’s centrally planned policies.

China’s economy is slowing, with 2019 growth expected to slow to 6.2 percent from 6.6 percent this year.

©2018 Bloomberg L.P.