Sunday, January 1, 2012

Chinese Leaders Comment on 2012 Monetary Policy

Top Chinese officials have recently made public comments on the direction of monetary policy in China for 2012.  China's President, Hu Jintao, said in his New Year speech: "We will continue to properly deal with the relationship among maintaining a stable and relatively fast economic growth, adjusting economic structure and managing inflation expectations."  Meanwhile, People's Bank of China Governor, Zhou Xiaochuan said the PBOC "will continue the prudent monetary policy and maintain the continuity and stability of its policies."

The People's Bank of China raised interest rates a total 75 basis points last year, and the required reserve ratio (RRR) by 300 basis points in the first half of the year, with one 50 basis point reduction in the RRR in December.  At the PBOC's fourth quarterly monetary policy committee meeting, the committee emphasized recent domestic and international economic developments and their impact on continued implementation of prudent monetary policy, and the use of counter-cyclical monetary policy and macro-prudential tools.

Also, in acknowledgement to signs of stress in the domestic economy, such as social finance, local government debt, and falling house prices, Zhou Xiaochuan said: "Systematic financial risks will be effectively prevented to promote the healthy and fast development of the national economy,".  The PBOC governor also noted "while keeping a reasonable social financing growth, the bank will also optimize the lending structure, deepen financial reforms and improve foreign exchange management."

On the numbers, China has seen annual CPI inflation fall from a high of 6.5% in July 2011, to as low as 4.2% in November.  Meanwhile GDP growth slowed to 9.1% in the September quarter, from 9.7% in the March quarter; most commentators expect the Chinese economy to grow about 8% in 2012.  The Chinese Yuan (CNY) has appreciated by about 4.5% in 2011 against the US dollar, with the USDCNY exchange rate now trading around 6.30.


  1. Chinese Premier, Wen Jiabao, has also weighed in, noting that 1Q12 will be 'relatively difficult' and that monetary policy will be fined-tuned as needed.

  2. We are watching for a potential Required Reserve Ratio cut prior to the Chinese new year (The year of the Dragon begins on the 23rd of January) of 50 basis points to boost liquidity. Any further loosening will likely depend on the path of inflation on the one hand, and the extent of any internal and external economic downturn on the other hand.

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