Q3 data may reflect recovery momentum

Prudent, flexible monetary policy and targeted steps to sustain growth pace

China's economy is projected to recover further during the third quarter and clock a higher GDP growth rate on the back of the prudent, flexible monetary policy and targeted measures to sustain the recovery, central bank officials said on Wednesday.

Given the optimistic economic projection, China's policy rates and the benchmark lending rate－the loan prime rate－have remained stable and match the economic fundamentals, Sun Guofeng, head of the monetary policy department of the People's Bank of China, the central bank, said on Wednesday.

The central bank will use various policy tools in the ensuing months to maintain reasonable growth of broad money supply and aggregate financing, said Sun.

China's broad money supply, or M2, increased by 10.9 percent on a yearly basis to 216.41 trillion yuan ($32.13 trillion) by the end of September, compared with 10.4 percent in August and 8.4 percent in September 2019.

New yuan loans rose by 13 percent from a year earlier by the end of September, a growth rate that remained unchanged on a monthly basis. Aggregate financing, a broader measure of financing for the real economy, including government bonds, reached 280.07 trillion yuan, up 13.5 percent, according to PBOC data.

Ruan Jianhong, head of PBOC's statistics and analysis department, said the financial data suggest a "reasonable" growth rate of money supply and aggregate financing that is not "too fast". However, the macro leverage level, or the debt-to-GDP ratio, might have increased because of the counter measures to mitigate the impact of the COVID-19 pandemic.

During the first three quarters, yuan-denominated loans rose to 16.26 trillion yuan, while the macro leverage ratio is likely to increase by 8.1 percentage points this year, which is also the average annual growth rate since 2017, according to Ruan.

"We expect that China's GDP growth will continually accelerate in the third quarter, which will help maintain a reasonable macro leverage level," she said.

PBOC Governor Yi Gang said in an article published in China Finance over the weekend that the nation will maintain "normal" monetary policy for as long as possible, make sure the liquidity remains ample, and facilitate reasonable growth of money supply and social financing.

At the quarterly meeting of the PBOC monetary policy committee, banking authorities called for the monetary policy to be "more precise and targeted", to make full use of structured monetary policy tools and increase the "directness" of its policies, in order to better balance the goals of long-term economic stabilization and risk control.

Since China maintained a conventional monetary policy and avoided too much of policy easing, interest rates remained at a relatively higher level compared with many advanced economies, while inflation expectations were modest during the recent months, said experts.

"Market expectations about China's growth appear to have improved significantly from March onward and are at late-2019 levels, manifesting a true V-shaped (economic recovery)," said Shan Hui, an economist with Goldman Sachs (Asia), in a research note. "But re-pricing in rates since May was mostly driven by changes in the market perception of the policy stance."

As China is still in the process of transitioning from a quantity-based economy to a price-based framework, precisely gauging the monetary policy stance can be challenging as "the central bank utilizes many instruments, balances many objectives, and faces many constraints", said Shan.