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Chinese stocks rose and bond yields fell after the country’s leaders changed their stance on monetary policy to “moderately loose” from “prudent” for the first time in 14 years to boost an economy teetering on deflation.
The announcement by the Communist Party’s politburo, headed by Xi Jinping, comes as leaders prepare to hold their annual meeting this month to lay out the economic agenda for next year.
“Next year, we have to . . . implement a more proactive fiscal policy and a moderately loose monetary policy,” the government statement said.
It added that authorities should “strengthen extraordinary counter-cyclical adjustments and . . . strongly stimulate consumption, improve investment efficiency and expand domestic demand in all directions.”
China’s 10-year bond yields hit a record low of 1.92 percent, continuing a broad-based rally and defying warnings of a “bubble” in government bond prices. Bond yields move inversely with prices. Hong Kong’s Hang Seng China Enterprises index closed up 3.14 percent after the policy announcement.
“To avoid a debt-deflation loop, China’s policymakers need to step up fiscal measures to boost consumption,” said analysts at Brown Brothers Harriman. “As such, the latest announcement from the Politburo is encouraging.”
China last adopted an “appropriately loose” stance in late 2008 after the global financial crisis and ended it in late 2010. Monday’s change in stance was seen by investors as a sign that the leadership is taking China’s economic problems more seriously.
The the Chinese economy months were followed by deflationary pressures from the property slump, prompting the government to announce monetary stimulus in September and fiscal measures in November mainly targeting local government debt.
The economy flirted with outright deflation in November, data released Monday showed, adding to pressure on Communist Party officials to do more to revive consumer sentiment.
China’s consumer price index rose 0.2 percent on a year-over-year basis, the lowest in five months and below a Reuters poll of analysts who had forecast a 0.5 percent rise. On a monthly basis, prices fell by 0.6 percent from October to November.
The country’s producer price index, which measures the prices of goods sold by Chinese manufacturers, fell 2.5 percent year-on-year, compared with analysts’ forecasts for a 2.8 percent drop and a 2.9 percent drop in October, continuing a two-year slump a series of declines in factory output prices.
The Communist Party is expected to hold one of its main annual economic policy meetings, the Central Economic Working Conference, in the coming days, and analysts are eagerly awaiting any signs of a more concerted effort to revive household spending.
“China’s economy continues to flirt with deflation, highlighting the inadequacy of past stimulus measures in restoring private sector confidence, reviving domestic demand and getting growth back on track,”
said Eswar Prasad, a professor at Cornell University.
He said the work conference offered an opportunity for the government to “present a broader package of targeted fiscal stimulus and reform measures” to boost growth and reduce the risk of “deflationary pressures taking root”.
Beijing’s stimulus measures over the past few months have included monetary measures to boost the stock market, cut interest rates for mortgage holders and ease restrictions on home purchases.
The Central Government has also announced a Rmb10tn ($1.4tn) debt swap plan whose aim is to enable local governments to make up for arrears of salary payments and suppliers who are in arrears.
But a growing number of economists and scientists in China are calling for greater efforts to boost household spending beyond existing government programs, which have been aimed at subsidizing consumers to upgrade appliances or buy new vehicles.
Some hope the Central Economic Working Conference will focus on these issues, although the high-level meeting is more likely to signal policy direction rather than include detailed announcements.
“We expect policymakers to show increasing concern about headwinds to growth and signal further stimulus to bolster domestic demand and stabilize growth, with a greater focus on consumption, risk containment and high-tech manufacturing,” Goldman Sachs analysts said.
