Jul 25, 2019 08:51 PM

Opinion: An Uncommon Policy Mix Could Benefit Creditworthy Firms

During the cyclical economic slowdown from the first quarter of 2018 to the end of this year’s first quarter, China adopted the common combination of a loose monetary policy and a proactive fiscal policy.

However, since policymakers in April described economic conditions in the first quarter as “better than expected,” monetary policy has returned to neutrality and lending rates in the interbank market have risen slightly.

Though as total demand didn’t stabilize in the first three months and both domestic and foreign demand dropped in the second quarter, an uncommon situation has emerged — China has both a neutral monetary policy and a proactive fiscal policy, which includes large-scale tax and fee cuts.

A neutral monetary policy and financial deleveraging will cause a structural divide inside the corporate credit environment and pose higher demands on enterprises’ creditworthiness.

Under the current situation, when the actual credit rate for enterprises has risen, it would not be a good idea to substantially increase or shrink the money supply, especially as total demand is likely to drop further.

Therefore, policymakers have begun to mention “reducing the actual interest rates for corporations,” rather than comprehensively easing monetary policy. Now is a good time to push for liberalization of lending rates, which can be achieved by linking benchmark lending rates to market-orientated interest rates.

Liberalization of lending rates will reduce the borrowing costs of highly creditworthy enterprises, while the costs for their less creditworthy peers are unlikely to be cut.

In general, as monetary policy returns to neutrality, the coming policy approach will probably divide enterprises but benefit the private sector as a whole. The risk-free interest rate will drop slowly, and credit spreads among different enterprises will also be more differentiated.

Many large stockholders of listed companies who are obsessed with speculation will suffer from tight cash flow and lots of bad debts as they have pledged their shares. But companies with good profits and abundant cash flow will be pursued by investors.

An uncommon policy mix is not, however, unique to China, but has also appeared in the U.S. In the latest recovery of the U.S. economy, the Federal Reserve raised interest rates and shrank its balance sheet, but the White House chose a proactive fiscal policy, rolling out big tax cuts.

Shi Lei is president of Shanghai-based consulting firm Attractor Adviser Ltd.

Editor’s note: This commentary has been edited for length and clarity.

Translated by Guo Yingzhe (

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