Stuck in the Middle

The PBOC surprised domestic money markets with tightening signals ahead of the Chinese New Year holiday, seemingly in response to speculative activity in financial markets. China’s two-speed recovery, with exports and industrial production outpacing employment and domestic consumption growth, complicates the central bank’s selection of appropriate monetary policy settings. In this note, we argue the PBOC will ultimately be forced to prioritize the weaker components of the economy facing rising debt pressures in setting policy, but the bank will also struggle to maintain consistent policy signals.

Posted February 17, 2021
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