Era of easy money ending in China

Cash crunch unlikely despite higher interest rates: experts

Monetary policy will probably get tighter this year in China, but experts said that a liquidity crunch is unlikely in the world's second-largest economy.

Central banks around the world should no longer pursue loose monetary policies, Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said on Sunday during the Boao Forum for Asia Annual Conference, held in South China's Hainan Province. The PBOC is China's central bank.

Still, the retreat from easy-money policies will take time, and the process may be fast in some places and slow in others, depending on each nation's economy, said Zhou.

In the view of Li Daokui, director of the Center for China in the World Economy at Tsinghua University, the US appears to be moving fast.

U.S. monetary policy is heading back to normal, Li said during the Boao Forum on Sunday.

The Federal Reserve Board hiked its benchmark interest rate for the second time in three months on March 15, showing its rising confidence in U.S. economic growth. The markets expect two more increases this year.

During the forum, Zhou also warned that authorities should not rely on monetary policy too much.

"Loose monetary policy can stimulate an economy in the short term, but it will have side effects, and it has limited ability to achieve genuine structural economic reform," Xu Gao, chief economist at China Everbright Securities, told the Global Times Sunday.

These factors may partially explain why there have been signs in the market that China's monetary policy is also shifting from a loosening bias. The PBOC raised the costs of seven-, 14-day and 28-day reverse repurchase agreements by 10 basis points each in February.

The PBOC also raised the rates on its standing lending facility (SLF), a tool used to give short-term liquidity support to policy banks and commercial lenders, short-term loans by up to 35 basis points.

China really has been tightening liquidity so far this year to prevent asset bubbles and curb inflation risks, said Xu.

The country aims to keep consumer-price inflation under 3 percent for the current year, unchanged from the previous year's target, according to its government work report delivered by Premier Li Keqiang early in March.

Xu said that China's economic recovery provides a foundation for the PBOC to tighten liquidity.

China's economic expansion is under pressure amid domestic reform and overcapacity reduction, but growth is estimated to maintain momentum.

In January, the IMF upgraded its forecast for China's GDP growth this year to 6.5 percent, up 0.3 percentage point from its October projection. Its forecast for GDP growth in the U.S., the world's largest economy, is 2.3 percent.

One important barometer of liquidity in the domestic financial system, the Shanghai Interbank Offered Rate (Shibor), has also indicated tighter liquidity. On Tuesday, the one- and three-month Shibor rates rose to 4.3558 percent and 4.3846 percent respectively, official data showed. Both figures were at the highest level since April 2015.

Shibor is a daily reference rate that tracks the cost for banks to borrow among themselves. Rising rates signify that the domestic credit market is tightening due to short-term capital scarcity.

However, there is no need to worry about a cash crunch in China, because the PBOC has promised to keep its monetary policy neutral and stable, said Xu.

Both Xu and Li said that China's monetary policy is still being kept fairly loose to support domestic economic growth and structural reform.

In addition, "We are also very concerned over the spillover of U.S. monetary policy that may impact the capital outflows [and then add pressure on domestic credit]," said Li.