Monetary policy in China has been all over the news lately with the PBOC winning the award for central bank of the year. At the same time while China’s central bank has been commended for its success in stimulating the economy and promoting infrastructure development economists are aware that real challenges for the bank are right around the corner. China’s bank is faced with the challenge of strengthening liquidity while at the same time beginning to reel in the increase in money supply which has hovered over 13% the last two years and which is on pace to reach a similar level this year. The desire for loans is still high and recently the Shanghai Securities News reported that the top four state banks speeded up new lending in January by 50 billion yuan from 270 billion yuan a year earlier.
However, while liquidity is necessary to finance the investment in the infrastructure that is facilitating growth much of the money that is being borrowed is being tied up in assets are loaned out to smaller businesses which has increased debt risks that are a growing concern. Moreover, potential growth is falling as the population ages and resource and environmental constraints necessitate reforms and adjustments that will further slow growth. In regard to these concerns the “PBOC will push financial reforms, including widening the issuance of interbank certificates of deposit (CD) and increasing the two-way float of the yuan” in the hopes that it can tow the line between preventing cash crunches and debt risks.