Quantitative easing in the developed world threatens to flare up inflation in China, Yi Gang, deputy governor of the People’s Bank of China (PBOC), said in Tokyo on Sunday, in comments that could dash hopes of further monetary action to boost growth.
In an address to the annual IMF meetings Yi, said: “If you have quantitative easing and that influences commodities, especially energy and food, it would influence inflation through imports.”
“The main inflation threat is agriculture and the second thing is the imported energy threat through commodities, raw materials and energy imports,” he said.
Yi – delivering a speech on behalf of PBOC governor Zhou Xiaochuan, who had backed out of his trip to Tokyo earlier in the week amid an escalating territorial dispute with Japan – expressed confidence that inflation would be “fine” this year in China, forecasting it at around 2.7% for the year. But during the 30-minutes address he reiterated six times that the PBOC’s policy main priority was combating inflation.
The PBOC’s hawkish message is likely to dash hopes of any quick action to boost growth, despite increasing worries in the markets of a hard landing. Prominent economists and investors told Emerging Markets during the four days of the meetings that China’s economy was likely to slow dramatically.
Harvard university professor Kenneth Rogoff said that growth could hit 3% in the next five years while George Magnus, senior adviser to UBS Investment Bank, said that the US is likely to retain its top spot as China’s cost advantages are slipping.
The PBOC is looking primarily at inflation and afterwards at growth, unemployment and the balance of payments, in that order, when deciding on monetary policy, Yi said.
He noted that the leaders of local governments were “eager to develop” their areas and wanted investment and ability to export.
“The desire for higher growth is all over the country,” he said. “As a central banker you have to remind them [local government leaders] of the dangers of inflation. A high quality growth rate is optimal and sustainable.”
‘APPROPRIATE’ SIZE FOR STIMULUS
But he poured cold water on hopes for a stimulus of the size of the one enacted after the 2008 Lehman collapse, which has caused a construction boom but four years later has left the country witha big problem of ‘ghost towns’ — thousands of blocks of brand new apartment blocks that remain empty because not many people afford to buy them.
"The stimulus package, I think, this time will be appropriate in terms of size,” Yi said. “When I say appropriate in terms of size, that is large enough to stabilize growth, but not too large to cause some further negative impact, or negative problems in the future," he said.
On monetary policy, Yi noted that the PBOC was fond of using a tool that was almost forgotten in developed economies — the reserve requirement ratio, or RRR, which is the proportion of deposits that commercial banks must keep in reserve with the central bank.
“From 2003 until now, we had 36 RRR moves: 32 increases and 4 decreases,” he said. “Mostly we increase or decrease RRR by half a percentage point.”
He also said that China established its own reference rate, the Shibor (Shanghai interbank offered rate) in 2007 as a domestic benchmark and that it was free from the accusations of rigging that cast doubts over the accuracy of London’s Libor.
“We have a set of rules to supervise Shibor, the reported Shibor and the actual transaction rate,” he said. “We monitor the two.”
Commercial banks in London were accused of deliberately reporting higher or lower rates for the purposes of setting the level of the Libor than the ones they effectively used in their transactions to make themselves look safer during the financial turmoil.
Despite the fact that the PBOC’s main priority is guarding against excessive price rises, the Chinese central bank does not intend to introduce an inflation-targeting regime like the one used by the European Central Bank (ECB).
“I think inflation-targeting is a very good framework but it’s more appropriate for small, open economies,” Yi said. “The US, Japan or India don’t use inflation-targeting. We will continue to have a multiple-objective policy with a focus on inflation.”
The PBOC has removed some barriers from the use of the renminbi internationally but it does not have a timetable for further liberalization of the yuan, he said.
“The internationalization of the renminbi is entirely market-driven,” he said. “I don’t promote it.”
The PBOC has a policy of diversifying its foreign exchange reserves, Yi said, adding: “that means that we will continue to invest in major markets; we also have to control risks.”
Many analysts have warned that the construction boom that happened when China offered massive stimulus to its economy has now created a bubble in its housing sector.
“We certainly don’t want to have a bubble, we want to stabilize house prices,” he said, but added: “we want to do this very carefully, so we don’t have some sudden, dramatic developments.”