The Shanghai G20 meeting concluded with little to show; though little was expected. In line with other global finance leaders’ meetings, the group recognized that while the world economy continues to expand below trend growth, the situation isn’t dire enough to call for coordinated action.
Going into the meeting, People’s Bank of China (PBOC) Governor Zhou Xiaochuan garnered the most attention given that China was hosting the summit. Questions surfaced about how the central bank would balance foreign exchange rates and much needed reform programs. Unsurprisingly, Governor Zhou reiterated the fact that there was no basis for continued weakening of the yuan and that he would not support exports using competitive devaluation.
Instead, growing acceptance over the use of negative interest rates as a form of monetary policy to spur growth seemed to overshadow China and the RMB. This was best summarized by German Finance Minister Wolfgang Schäuble, who said “the debt-financed growth model has reached its limits,” and central banks accepting negative interest rate policies will become a recurring and important theme. The implications are important. First, from an economic standpoint, negative interest rates are viewed as irrational policies as they counter the idea that the future value of money should be greater than the net preserve value. Second, the functioning of banks wanes as they pass up deposit costs in order to prevent withdrawals.
Like other economies, China will need to navigate around this situation. After markets closed on the Monday following the G20 summit, the PBOC cut the reserve requirement ratio (RRR) by 50bps, a move that was seen as a surprise due to the timing of the decision. Releasing an estimate RMB700bn in the banking system, the PBOC move is viewed as extended loose monetary policies, though the liquidity injection likely offsets some open market operations that are expected to mature later on. This would suggest that the PBOC is focused on its domestic policies, which investors should welcome.
China’s next major meeting will be the annual National People’s Congress (NPC) scheduled for the beginning of March. Central authorities are expected to revise their growth estimates from “around 7%” to a stabilized 6.5% to 7.0% estimate. No large scale stimulus is expected. However, following Zhou’s comments at the G20 meeting, it shouldn’t be a surprise to see the PBOC offset counter cyclical measures as it addresses supply side reform. The NPC meeting will likely provide the market with greater clarity on the thinking of the PBOC, especially since this meeting will not be attended by the other 19 G’s.