Boao Forum | Zhou warns on growth slowdown, says PBOC has room to act

Zhou Xiaochuan

China’s central bank chief said that the nation’s growth rate has tumbled “a bit” too much and that policy makers have scope to respond, underscoring forecasts for further monetary easing in the world’s second-largest economy.
“China’s inflation is also declining, so we need to be vigilant to see if the disinflation trend will continue, and if deflation will happen or not,” People’s Bank of China Governor Zhou Xiaochuan, 67, said in remarks at the Boao Forum for Asia, an annual conference on the southern Chinese island of Hainan. “China can have room to act,” both with interest rates and “quantitative” measures, he said.
Zhou’s remarks followed fresh signs that China slowed further in the first quarter, after recording its weakest expansion since 1990 last year. A gauge of manufacturing slid to an 11-month low in March, a private report showed last week. Economists surveyed by Bloomberg News expect the PBOC will lower both benchmark lending rates and banks’ required reserve ratios, adding to cuts made in recent months.
China’s leadership is trying to wean the economy off debt-fueled property investment and old-line polluting industries, shifting toward services and domestic-consumption led growth. While President Xi Jinping has repeatedly said his nation is comfortable with a “new normal” of less-rapid expansion, officials are also wary of the slowdown weakening too much.
Premier Li Keqiang earlier this month set a growth target of about 7 percent for this year, while pledging action if it slows toward the lower limit of the range and cuts into jobs and income. Zhou said at Boao Sunday that the economy had slowed “a bit too sharply,” while adding that patience was needed to see the effect of steps already taken.
Even with a more moderate pace than in the past, Xi told Boao attendees Saturday that his nation “will continue to provide countries including Asian nations more markets, growth, investment and cooperation opportunities.”
China is building its influence even amid the slowdown, championing new lending institutions, including the Asian Infrastructure Investment Bank, which saw additional nations signing up in recent days. U.S. allies including the U.K., Australia and South Korea are among the supporters of the AIIB, after they set aside American opposition.
Zhou at Boao Sunday highlighted how China is working on reform of its currency, the yuan, which has been subject to limits on capital flows and restricted movements against counterparts. China will revamp foreign-exchange regulation “relatively radically” this year, the PBOC chief said. Earlier this month, he pressed the head of the International Monetary Fund to consider the yuan for inclusion as an official reserve currency — by adding it to the fund’s special drawing rights unit.
In addressing the risk of deflation, Zhou’s concerns reflect those of many counterparts around the world. Japan saw its benchmark gauge of inflation stagnate in February, according to a report released on Friday. European monetary policy makers have stepped up easing to combat the danger of falling consumer prices, which can inflate the real burden of loans.
“Further policy easing is on the way, there’s no doubt about that,” said Guan Qingyou, chief macro-economic researcher with Minsheng Securities Co. in Beijing. “The central bank seems to realize that it’s better to act sooner than later given consideration to China’s deepening slowdown and deflationary pressure.”
The major economy with perhaps the least concern on that score is the U.S., which has enjoyed a strengthening job market in recent months. As a consequence, the Federal Reserve has been preparing the ground for its first interest-rate increase in years, a shift that has seen the dollar climb since the middle of last year.
Zhou told an audience that included central bankers from Japan and Germany that by many nations easing policy, the dollar could become too high. Officials will need to be cautious about capital flows, he said.
The governor said that patience is needed to observe the impact of monetary measures. The PBOC announced its first interest-rate cut in two years in November and followed with another reduction Feb. 28. It also lowered banks’ reserve ratio requirements last month.
China’s disinflation eased in February after the central bank stepped up easing and the Lunar New Year holiday pushed up food and transport costs. The consumer-price index rose 1.4 percent from a year earlier, compared with January’s 0.8 percent, data from the statistics bureau show.
The government set a 2015 consumer inflation target of 3 percent in its annual work report earlier this month.
The room the country has to move on monetary policy “is not necessarily for quantitative easing,” Zhou said. There is scope “on both the price side and the quantitative side,” he said.
Chen Yulu, an academic member with the central bank’s monetary policy committee, an advisory body, was quoted by Chinese journal Caixin as saying Sunday that the “non-conventional” policy in China means “continuous policy relaxation.”
“In the monetary policy committee, the discussion is always about looking for new structural tools to use, including targeted easing,” Chen was quoted as saying. Bloomberg