Monetary policy alone will not fix China's cooling economy. Photo: AFP / Fred Dufour
Monetary policy alone will not fix China's cooling economy. Photo: AFP / Fred Dufour

The policy debate on China’s slowing economy has taken another twist. On Friday, analysts called for an adjustment in fiscal policy and a loosening of financial regulations as growth cools and trade tensions with the United States increase.

In an article for the Financial News, which is run by the People’s Bank of China or PBOC, they pointed out that monetary policy, which falls into the PBOC or central bank’s remit, would not be able to resolve the issues of corporate funding challenges without a two-pronged strategy.

Ming Ming, a CITIC Securities fixed-income analyst, stressed that maximizing the effectiveness of monetary policy requires active coordination with fiscal and regulatory policies. Fiscal policy comes under the jurisdiction of the Ministry of Finance.

“There is still a lot of room for fiscal policy [support and policymakers should focus on the] strength and rhythm of regulations, fully considering the impact on market expectations,” Ming said in the article.

As the policy row rumbles on, concerns are growing about the state of China’s slowing economy, rising debt and the aftershocks of the trade war with the US.

Last week, Xu Zhong, the director-general of the research bureau of the PBOC, heavily criticized the country’s fiscal approach when he triggered a heated debate in policy circles after he broke protocol by singling out the Ministry of Finance’s performance.

“There is ample room for fiscal policy, but evidence shows that the policy is not being implemented actively enough,” Xu said in a speech before the text was released to Chinese media group Caixin.

“Lowering local authorities’ willingness to pay off debt, which would pass the fiscal risks to the financial sector, [are] moves [which] may lead to moral hazard … and even trigger systemic risks,” he added.

Then on Wednesday, the war of words continued when Liu Shangxi, the head of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, made it clear that fiscal policy should help steer structural changes rather than stimulating growth.

“The current proactive fiscal policy, which is different from the traditional expansionary policy, is not direct government effort to expand demand, but indirect effort through stimulating market vitality, optimizing resource allocation and increasing quality supply,” Liu wrote in the official Economic Information Daily.

Still, Capital Economics, a research company, said the Ministry of Finance will loosen policy as pressure mounts.

“If nothing else, the recent debate suggests that officials agree on the need for policy loosening, even if they disagree about the exact form that it should take,” Julian Evans-Pritchard, a Capital Economics senior China economist, wrote in a note which was reported by Reuters.

What looks certain is that this latest salvo from China’s central bank might not be the last.