The ECB has just announced its huge QE program with monthly bond-buying of €60 billion, beginning from March until September, 2016. Within the past week, central banks of Switzerland, Denmark, Turkey, India, Peru and Canada have also announced interest rate cut. With IMF expecting a lower global growth rate for 2015 and 2016, deflation has become the foremost threat against economic development as well as the major target for monetary policies.
China's central bank PBoC, however, remains quite recently. Premier Li Keqiang also re-emphasized China's monetary discretion in Davos that no huge stimulus would be practiced, despite that the newly released CPI was lower than expected and 2015's GDP growth has achieved record low. Deflation also haunts China, yet what's PBoC's plan?
I still regard cuts in reserve ratio and interest rate as large probability events for the first two quarters of 2015. China's mainstream media has brainwashed the market that any expansionary measures from PBoC are huge incentives and "money-printing". In fact, these are merely rebalancing approaches to keep price stability for China at this stage. With increasing risks of deflation (adjusted for fall in oil price), I also expect more deregulation measures in the real estate market, such as tax cut and less purchase restrictions, to coordinate with PBoC's appeal for commercial banks to improve housing mortgage service with higher approval rate. China's economic malperformance in 2014 were largely due to stalled growth in real estate investment. And China's property sales were largely correlated with bank's ability to issue loans. Premier Li explained on World Economic Forum that China's housing market demand remains high from a long-run point of view, which indicates the government, including PBoC, will take measures to preempt potential recession in this sector.
While there is no need for PBoC to follow ECB's anti-deflation practices such as QE, China's central bank has to implement monetary expansion to the extent greater than the so-called targeted easing in 2015. There might be new policy tools, but PBoC should address the overall deflationary pressure existing in the market and boost the confidence of Chinese households and investors.
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