China’s Monetary Policy under the “New Normal”

How China’s “new normal” affects the conduct of monetary policy deserves a careful study. The enormous task of economic restructuring, amid conflicting goals, has certainly introduced a new set of challenges to macroeconomic management. This article provides empirical evidence to show that the conduct of China’s monetary policy has indeed changed and become less predictable since 2013. While supply-side structural adjustments significantly decrease local governments’ appetite for investment and create slacks in aggregate demand, macroeconomic policymakers feel compelled to ease off deleveraging pressures when the adjustment pains are considered unbearable. The monetary authority also faces the policy trilemma when the internationalisation of the renminbi requires a strong currency and free flow of capital. Furthermore, the dual-track interest rate system creates speculative capital movements between bank deposits and the money market which complicates the transmission mechanism of monetary policy. Inconsistencies are thus created, and reversals of policy direction are frequently observed.