(Yicai Global) Aug. 24 -- Monetary policy played a dominant role in China's economy last year, when the deposit reserve ratio and benchmark interest rate were lowered more than five times in one of the most dramatic monetary easings since 2009.
Macroeconomic policy has gradually come to focus on fiscal policy, which is more proactive. The consensus on this was reached at the beginning of the year, and it has become one of the key policy points.
Monetary policy implementation requires favorable conditions for other economic factors. Without moderately strong liquidity and loose monetary conditions, a proactive fiscal policy would be difficult to carry out. Both local government bonds and policy bank bonds need some liquidity support. In this sense, we say the coordination of other factors is necessary for implementing monetary policy.
Therefore, monetary policy will not be in pole position this year, especially compared with the role of fiscal policy. But monetary policy needs to support fiscal policy. Fortunately, there is still some room for maneuver when it comes to monetary policy. Despite the fact that the deposit reserve ratio was cut more than five times last year, it is still relatively high at 16 to 17 percent, whereas in the past the figure was normally around 5 to 6 percent. So, it is safe to say there is still a lot of room for monetary policy adjustment. It is the same with interest rates.
Many may claim that there is no room for interest rate cuts. But that is untrue. Given the current economic conditions, most sectors still face downward pressure and deflation worries -- the conditions for lower interest rates. Therefore, we have good reason to expect a cut in the deposit reserve ratio and in interest rates in the latter half of this year.
What needs to be stressed is that fiscal policy will play a leading role in China's macroeconomic policy this year, particularly in the second half, while monetary policy will play a supportive role.
China's current economic problems can be summarized as the following. Owing to some changes in structural factors, such as the end of the demographic dividend, China's potential growth rate is slowly declining. Meanwhile, problems have also appeared on the demand side. If people do not address the lack of demand or just ignore it for a long time, deflationary pressures will increase. As soon as the pressure of deflation intensifies into a deflation trap, not only will the problem of demand deteriorate, it will in turn aggravate the existing structural problems, leading to more difficulties in solving structural problems.
For instance, the debt problem is a structural one. When it is being solved, if deflation occurs, the risk of structural debt problems will further escalate, making them more difficult to solve. With this in mind, we should not ignore problems on the demand side.
The realistic method for objectively analyzing and solving China's problems requires that the supply side and demand side work together. The good news is that the mid-year meeting of the Politburo set the tone concerning China's economic policy in the current half year.
The market interpreted the change in its measures as an indication the government is no longer single-mindedly stressing supply side reform, while starting to address the expansion of demand, which is a good start. In the future, we hope both sides will be addressed when policies are implemented, so that China's economic problems can be resolved as soon as possible.