By staff reporter Li Zengxin

Unless the global economy dives even deeper, China’s central bank is more likely to make targeted structural adjustments than a full-scale release of monetary policy, says economist Shen Minggao.

How should the Central Bank respond to the economic slowdowns in Europe and Japan that are sure to decrease demand on China? That is the question posed by Shen in Caijing’s latest “Macroeconomic Weekly Review.” The answer hinges on another question: how tight is China’s monetary policy already? Not so tight, he says, pointing to liquidity and financing cost.

Already this year, the People’s Bank of China has sent out three “tightening” signals. It has raised interest rates, lifted the required reserve ratio (rrr) for commercial loans and accelerated appreciation of the yuan.

First of all, even though the reserve ratio was raised, the interbank overnight discount rate was not, so liquidity did not get squeezed too tight.

Even the negative real interest rate does not necessarily indicate a tight monetary policy. Though the inflation rate has climbed since late 2007, the nominal interest rate (currently at 4.14 percent per year) minus the consumer price index has fallen into a negative horizon.

The true reason why some companies have difficulties getting loans, he writes, is credit control. Quotas for commercial loans have been more of an administrative policy than a monetary policy. Deposit rates are set for commercial banks, but they are free to raise lending rates. This has encouraged banks to issue more loans, a main driver for excessive liquidity.

Forth, even if liquidity were squeezed, growth in nominal investment did not slow. Fixed asset investment kept up at a fast clip, although smaller enterprises felt the credit pinch more than larger ones; those in eastern China felt the credit pinch more than those in western China.

In a word, though he doesn’t consider the current monetary policy tight, Shen said that loosening credit control will reduce resource “misallocation.”

However, it is unclear how a total relaxation of credit control would stabilize the economy. If commercial banks have strong incentive to control risk and select the best clients, they may be reluctant to lend; if they were prompted to lend as much as they can, it could lead to a new wave of excessive liquidity.

Therefore, the central bank will probably not totally relax monetary policy, unless the global economy severely worsens. “Partial adjustment is appropriate,” Shen said, adding that lowering reserve ratio requirements for smaller banks could help small- and medium-sized enterprises get funds.

Caijing’s fourth “Macroeconomic Weekly Review” of September 8 also contains a “Caijing Website Survey – Winter Comes for Real Estate Market” section. Summarizing feedback from more than 2000 readers, Caijing concludes that homebuyers are hesitant; they would be less so if prices were to drop 20 to 40 percent; in the long term, demand will be robust; risks of default in mortgage loans have less direct impact to the banking system.

In the “Macroeconomic Focus – Farewell Olympics Games, Confronting New Challenges,” Caijing finds most experts believe China’s major risk comes from weakening external demand, and the country’s biggest challenge will lie in transformation of the nature of its economic growth.