PBOC Signals Structural Reforms, Not Policy Easing

The author is Nomura economist Zhiwei Zhang.

The People‟s Bank of China issued the second quarter Monetary Policy Report today. We think the key messages are that monetary policy will likely remain tight in the third quarter and the importance of reforms is emphasized.

The top priorities for the PBOC changed from "stabilizing growth, containing inflation, managing risks" appeared in the first quarter report to today’s "stabilizing growth, re-balancing the economy, promoting reforms, and managing risks".

The phrase "promoting reforms" first appeared as a top priority in Premier Li Keqiang’s speech on July 9, and was reiterated in the Politburo meeting press release on 31 July.

This suggests to us the government feels more urgency to push for structural reforms instead of cyclical expansionary policies to promote growth.

We believe this change of policy focus is a positive for the Chinese economy in the long run.

The latest report also gave a positive assessment of economic conditions, similar to the tone in the first quarter report. It thought the economic re-balancing showed some positive developments, the labor market remained resilient to the economic slowdown, and global economic conditions are stable.

The report mentioned overcapacity in manufacturing, the reliance on infrastructure investment and environmental challenges as new headwinds for the economy.