外文报告：CICC-Central Banks Face New Challenges Macroeconomy Weekly 203-120702

Please read carefully the important disclosures at the end of this report
English Highlights




July 2, 2012 Economy RESEARCH
Central Banks Face
New Challenges
Wensheng PENG
SFC CE Ref: ARI892
pengws@http://wendang.chazidian.com
Yang ZHAO
zhaoy@http://wendang.chazidian.com
Tun LIN
SFC CE Ref: AWE515
lintun@http://wendang.chazidian.com
Macroeconomy Weekly #203

Highlights
EU summit results will boost market confidence in the short term, but great uncertainties remain in the medium-to-long term.
Central banks of developed countries are returning to their traditional role which involves more responsibility for maintaining
financial stability, and financial repression is emerging. The countercyclical policy easing by China’s central bank may be
troubled by the risk of a property bubble.
Overseas: EU summit just a shot in the arm, central banks taking on more responsibilities
The EU summit’s decisions to allow the bailout funds to recapitalize Spanish banks directly without gaining preferred creditor
status and create a single supervisory mechanism by the end of 2012 enhance market confidence. However, these decisions are
not quick fixes. The debt problems could deteriorate again before the end of this year. We expect the ECB to cut interest rates
this week. The Bank of England may release details of its funding-for-lending scheme to encourage bank lending to the real
economy.
In advanced economies, the role of central banks is expanding. Two trends warrant attention: 1) besides monetary policy,
central banks are taking on more responsibility to maintain financial stability (e.g. the ECB is empowered to supervise banks);
2) central banks are re-imposing “financial repression”, adopting unconventional measures to support the real economy. As the
effect of quantitative easing diminishes, the Bank of England and HM Treasury have jointly intervened in bank lending.
The expansion of central banks’ responsibilities increases the pressure for monetary easing during deleveraging. Providing
liquidity may become the easiest way for the ECB to maintain banking stability. Financial repression means the contraction of
the financial system in advanced economies is not just a short-term phenomenon. These changes may exacerbate the volatility
in global capital flows, posing more challenges to emerging markets’ monetary policy.
China: Growth still weak but showing signs of stabilizing, monetary policy constrained by property market
The weak external demand means China will rely more on domestic consumption and investment to drive economic growth.
However, as the structural problems developed in the past few years become increasingly prominent, countercyclical policy
easing faces many challenges, especially in relation to property tightening. Monetary policy needs to find a balance between
stabilizing economic growth and deflating the property bubble.
June PMI suggests economic growth momentum remains sluggish, but there are signs of stabilization. PMI fell to 50.2 in June,
barely staying in expansion territory. The big drop in the input price index indicates the risk of a short-term inflation rebound is
low. The new orders, new export orders, raw material inventory and employment indices are in contraction territory, signaling
weak aggregate demand. We expect the June macro data to show a decline in inflation, growth stabilizing at low levels, and
improved broad liquidity.
We expect further monetary easing as inflation falls significantly and the weakness in economic growth momentum persists.
An interest rate cut is likely in August. But if property prices rebound significantly, monetary policy will be constrained and the
possibility of another interest rate cut in 4Q12 will be reduced. The most important lesson from developed countries’ problems
today is that if asset bubbles are not curbed in the period of demographic dividend, they will do great harm to the economy in
the medium-to-long term.