China Can Loosen Monetary Policy Without Fretting Over Yuan Depreciation, Scholar Says

China has potential room to implement further monetary easing to support economic recovery despite risk of yuan depreciation, according to Zhang Liqing from the Central University of Finance and Economics[para. 1][para. 2]. He notes that a controlled devaluation can potentially benefit the economy as evidenced by past experiences in China and other countries[para. 2].

Despite recent economic improvements, uncertainties in the property market remain a concern. Zhang suggests the government could deploy more monetary easing and expansionary fiscal policies, and undertake stronger structural reforms to support the economy, although these measures might pressure the yuan[para. 3]. Given the interest rate gap between China and the U.S., preventing further depreciation could mean raising interest rates or enhancing capital controls, actions that might harm China’s growth[para. 4]. A slight depreciation to around 7.5 or 7.6 yuan per U.S. dollar is deemed acceptable[para. 5].

Last month, the People’s Bank of China weakened its daily reference rate for the yuan further, reflecting a willingness to allow more depreciation amidst poor economic sentiment and unchanged high U.S. interest rates[para. 6]. However, Zhang warned that high macro leverage ratios might limit further monetary easing[para. 7].

In the short term, China’s economic recovery greatly depends on the rebound in the property market. Effective government policies could stimulate a significant rebound, but their failure could maintain substantial economic uncertainties[para. 8]. Policymakers have introduced waves of supportive measures like lowering down-payment ratios and removing minimum mortgage rates for significant impact[para. 9].

Fiscal policies may provide more immediate benefits than monetary policies. It is crucial for the Chinese government to optimize its spending by focusing on infrastructure projects that do not lead to underutilized outcomes and instead channel funds towards social security, education, and healthcare to increase consumer spending[para. 10][para. 11]. Reducing the financial burden on small and midsize enterprises by cutting taxes and fees could also be beneficial[para. 12].

In the long term, China needs new growth drivers beyond infrastructure, real estate, and exports, which are weakening. Zhang emphasizes the importance of structural reforms and opening more economic sectors. Improving “total factor productivity,” which includes efficient use of labor, capital, and technology, is vital due to an aging population and potential scarcity in capital and labor[para. 13].

Externally, China faces uncertainties like the upcoming U.S. election and potential tariff hikes on products including electric vehicles. These uncertainties could be a catalyst for China to expedite economic restructuring towards greater domestic demand reliance. Keeping a controlled trade deficit might be advantageous for economic adjustments[para. 15][para. 17]. Prioritizing a trade surplus might delay essential economic adjustments[para. 18].

In conclusion, China's potential for monetary easing combined with strategic fiscal policies and comprehensive structural reforms could pave the way for a more robust economic recovery, despite external uncertainties and internal challenges in its traditional growth sectors[para. 19].