China’s monetary policy: The good news, and bad
By Bob Davis from The Wall Street Journal
Here’s a good news/bad news evaluation of China’s monetary policy by three economists at the San Francisco Federal Reserve.
The good news: monetary policy has a much stronger effect on China’s economy than usually believed, write John Fernald, Eric Hsu and Mark Spiegel in a new Economic Letter from the San Francisco Fed.
The bad news: the People’s Bank of China hasn’t done a bang-up job of using its monetary tools.
To evaluate the PBOC’s track record, the three economists had to put together a series of economic data that they could believe. The model they used, based on statistical work by former Fed chairman Ben Bernanke among others, uses a lot of different data series to make up for the possibility that some individual stats may not be worth the spreadsheets they are typed on. Or as the economists more delicately put it: “This approach uses numerous related data series to alleviate concerns that individual data might suffer measurement error.”
Interestingly, the graph they came up shows the Chinese economy falling into negative territory in 2009, using quarter-on-quarter data, among other measurements. China’s official GDP data never dropped below 6.6% growth during the 2008-2009 global financial crisis, though China measures data year-over-year.
The economists find that monetary policy—cutting or raising interest rates and bank-reserve requirements – has a big impact on China’s economy. That’s contrary to the usual analysis, which argues that China’s banking sector isn’t affected much by market-based instruments because big state-owned borrowers borrow no matter what the interest rate, figuring that the Chinese government has their back and won’t let them default. Their finding is good news because it suggests the PBOC has the ability to help the economy if needed.
On the other hand, the PBOC didn’t do an especially good job in running monetary policy, they argue.
“The reason is timing,” the economists write. “China was tightening monetary policy early in 2008.” Given that interest-rate change takes time to work its way through the economy, monetary policy was tightening just as the global economy imploded. For China, that meant monetary policy was “exacerbating the effects of the global financial crisis,” the Fed economists write.
The PBOC didn’t respond to requests for comment on Monday, which was a holiday in China.
The three economists pat the PBOC on the back for more recent decisions. Since about mid-2013, Chinese monetary policy has been “modestly stimulatory,” they find. “That is, monetary policy appears to have mitigated the depth of the country’s slowdown,” the economists find.
As with many analyses of the PBOC, the Fed economists don’t take into effect – in fact, they don’t even raise the question—of whether the PBOC was actually in charge of monetary policy. The Chinese central bank isn’t independent. For big decisions, such as changes in the direction of monetary policy, it needs approval of the State Council, the Chinese government’s ruling body, and sometimes China’s uber-power, the seven-man Politburo Standing Committee. Obtaining that consensus can take the PBOC time and, critics argue, make it slow to react.
The U.S. Fed needs only to consult its staff and its members.
IMAGE: How effective? The headquarters of the People’s Bank of China. Bloomberg
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