The central bank says it is finding it difficult to maintain a prudent plan

Since November, China's central bank has adopted a series of measures to reduce the deposit reserve ratio and interest rate to ease financing pressures on the economy. Out of the two sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference this year, a Government Work Report was created to require a proactive fiscal policy. It recommended a prudent monetary policy to ensure that the economy grows.

But recently the central bank has found it hard to maintain a prudent monetary policy, instead suggesting a moderately easy monetary policy in the near future to factor in increasing pressures from the current economic downturn. On several occasions there have been hints of this shift in policymaking.

Chen Yulu, a member of the central bank's monetary policy committee and the president of Renmin University of China, gave the latest and most plain indication on March 29.

At a forum on the Chinese macro-economy at the university, Chen suggested that the newly adopted new normal model of growth is an unconventional monetary policy that makes being prudent difficult. He also said loosening monetary policy is "unconventional" because liquidity in the economy is sufficient.

"Every day the monetary policy committee discusses ways to spot and bring forward all structural monetary policy tools, such as quantitative easing and others," he said, but that the effects of implementation have been unsatisfactory.

The GDP grew at a rate of 7 percent in the first quarter of this year. "The insufficiency in effective demand may bring more stress than current structural factors. We should keep a close watch on deflation."

Chen is not the only one talking about deflation. Zhou Xiaochuan, the governor of the central bank, has expressed a similar view. These sentiments show that the central bank probably agrees on its judgment of the present economic performance.

The same day, at the Boao Forum for Asia, Zhou said the central bank will cautiously watch and track global economic trends, including lower inflation and cheaper bulk commodities in discussing China's next steps. It will also keep a watchful eye on China's economic situation and the risk of deflation. As the Chinese economy slows with lower inflation, it is essential to be careful and vigilant about deflation, he said.

This is a slight departure from just half a month ago, when Zhou said he was very conservative about deflation, saying "adequate attention should be given to price changes, and we need take more time to observe it discreetly. An estimation should be made after consideration over the long term". But half a month later, the central bank governor has subtly changed his attitude toward deflation. This shift should be taken seriously.

Deflationary pressure on the Chinese economy is coming from both international and domestic markets. Internationally, global deflationary pressures can be mainly attributed to the drop in international oil prices and bulk commodity prices. Since last year, the crude oil price has dropped by half, from over $100 to less than $50. According to figures from the State Statistics Bureau, February prices in the transport and communication sectors declined 1.7 percent from the previous year, creating the biggest drag on CPI. The plummeting oil price is a major contributor to these sagging numbers.

During the two sessions, Premier Li Keqiang said the Chinese economy has deflated passively and that the country had to make a stronger response. This passive deflation is a direct result of the impact of lower international commodity prices on the domestic economy. The deflationary pressure on the domestic market comes from the elimination of productivity and liability risks. In recent years it has been important to resolve productivity and liability issues as economic restructuring progresses, so weak demand in the real economy is also creating deflationary pressures.

It is going to take time for the global economy to recover. International oil prices and bulk commodity prices are unlikely to go back to their high levels, and China will have to keep adjusting its economic structure. These factors at the macro level indicate that deflationary pressures will exist over the medium- or long-term and we have to get ready for that. When we compare how other countries tried to tackle deflation, a looser monetary policy was employed. As for the European Central Bank quantitative easing measures and Japan's Abenomics, the aggressive monetary policies were adopted to cope with deflationary pressures. Confronted with the same pressure, China's central bank is likely to moderately adjust its monetary policy, which will be clear when the economic data from the first half of the year (or the first quarter) is published.

China came across a similar situation in 2008. At that time, monetary policy changed from its "two preventions" stance (to prevent economic growth from overheating and to stem inflation) to a stance of "one maintain, one control" (to maintain stable and rapid economic development and control prices from rising too fast) to ensure economic growth. Meanwhile the deposit reserve ratio rose five times in the first half of 2008, and the deposit reserve ratio - along with saving and borrowing rates - dropped five times during the second half of 2008 under policy control. It is rare to see such a big turn.

This year monetary policy may not go into reverse. But policymakers may have discussed about adjusting and continuing to ease the policy and repeated hints from central bank officials might herald a major policy change.

The author is a senior researcher with Anbound Consulting, a think tank for public policy. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 04/17/2015 page10)