Move aims to stabilize the economy and contain inflationary pressure

China may fine-tune macro policies around the fourth quarter to stabilize the economy and contain inflation pressure by mainly relying on driving up government-led investment and sustaining ample market liquidity, economic experts said.

The recent rebound of scattered COVID-19 cases and rising inflation pushed policymakers to reassess macro policies. They discussed reserving some space for the sake of "cross-cyclical matters" and preparations for downward economic pressure that may emerge around the end of this year, the policy advisers said.

Yi Gang, governor of People's Bank of China, wrote in an article for the Journal of Financial Research on Tuesday that at present, "China has the conditions to implement a normal monetary policy for a longer period, and there is no need to implement asset purchase operations right now".

Yi said the central bank will further deepen market-based interest rate reform, including the deposit rate. "If the deposit rate is needed to float downward in the future, it could be decided by market entities."

Wang Yiming, a member of the central bank's monetary policy committee, said on Monday that policy fine-tuning should be ready to hedge against economic slowdown risks in the fourth quarter as well as in the first half of 2022, before a projected bounce in the second half of next year.

Macro policy adjustments should be targeted and more efficient, Wang said. "The proactive fiscal policy could be stronger, focusing on accelerating local government bond issuance and injecting funds into real investment projects as soon as possible."

Wang predicted the central government may deliver a new quota of local government bonds in advance at the beginning of 2022, in a measure to speed up investment.

The monetary policy committee of the PBOC held a quarterly meeting on Sept 24, deciding to make plans on good cross-cyclical policy design and keep liquidity at a reasonably ample level.

The meeting vowed to ensure a healthy property market and better protect homebuyers' rights. While talking about the property market is rare in the monetary policy meeting, this showed the central bank's determination to maintain financial stability and prevent systemic risks, analysts said.

Members of the committee reiterated the need to strengthen the stability of credit growth, lower real lending costs, and keep the debt-to-GDP ratio at a stable level while the country's economic recovery is still not solid and uneven, a statement on the PBOC's website said on Monday.

"As the macroeconomic data slowed more than expected in August, the market began to wonder whether government policies would change and focus more on short-term economic growth," said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

"The adjustment of policies is only a matter of time. The government may think they can afford to wait till the year-end to loosen policies," Zhang said, adding he expected a "meaningful" change of macro policies around the end of this year, and China's economy to stabilize in the first half of 2022.

Wang from the PBOC's monetary policy committee mentioned potential shocks of monetary tightening in the United States as the Federal Reserve indicated this week it may be ready to begin tapering or gradually pulling back the stimulus it provided during the pandemic.

So policy fine-tuning should also hedge from spillover effects of the Fed's looming policy change and reduce volatility that may be aroused by falling asset prices and capital flows, Wang said.

"Measures should help stabilize prices. The energy and raw material price rise has already affected smaller businesses, and the consumer price index in the near term is predicted to be higher than the previous level," he added.

Lu Ting, chief economist in China with Nomura Securities, expects Beijing to use "more general easing measures" to offset its tightening stance in the property sector and industries with high carbon emissions.