China | What will be the monetary policy stance in 2021?

We prefer to support the argument that a neutral, prudent but accommodative monetary policy will be the main monetary policy stance in 2021, while the authorities will postpone the beginning of a real tightening cycle and “proactive deleveraging” to a later stage.

Key points

• Key points:
• A hot debate recently among policy makers and economists has been focusing on the next year’s monetary policy stance. the key divergence is whether the policy will remain neutral while accommodative or it will begin the tightening cycle to restart the deleveraging campaign to curb ongoing financial risks and asset bubbles.
• The domestic economy is not completely recovered to the pre-pandemic level while the global economy is far from stabilization, thus, accommodative policy support will be required for a while.
• Amid the ongoing strong RMB appreciation trend, hiking interest rate will lead to RMB further appreciation, giving pressure on exports in 2021.
• China’s easing monetary measures in the pandemic time has been already much prudent and restrained compared with what the authorities did in 2008-2009 Global Financial Crisis, let alone the flooding liquidities injected by the central banks of the advanced economies this year, thus the room for normalization is not that large in China.
• We predict a policy mix of neutral while accommodative monetary policy together with a more stringent financial regulation is more likely to be implemented in 2021.

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