China's central bank, or the People's Bank of China, has kept its main policy rates, including the Medium-term Lending Facility (MLF) and Loan Prime Rate (LPR), steady for eight consecutive months. Although the central bank has loosened monetary policy by reducing reserve requirements and increasing MLF operations to encourage lending, borrowing costs have remained stable.

Calls for further rate cuts have emerged as first-quarter inflation data showed a decline, with Consumer Price Index (CPI) up only 0.7 percent year-on-year in March, and Producer Price Index (PPI) down 2.5 percent. However, the central bank has not acted on market concerns about slowing price growth. In contrast, the MLF increment was significantly reduced in April, with only a net injection of 20 billion yuan compared to the previous months' net injection of hundreds of billions of yuan.

This suggests that the central bank is content with the economic recovery. The monetary policy committee's first-quarter meeting confirmed this view. Compared to the previous quarterly meeting, which addressed "counter-cyclical and cross-cycle adjustment," the first-quarter meeting only retained "cross-cycle adjustment." This indicates that the central bank believes the difficult period requiring strong stimulus has passed, and current policy has shifted to the "cross-cycle" phase to embrace an optimistic economic cycle.

But why did China's inflation data fall during the economic recovery? 

From a macro perspective, price indicators often lag behind in the economic cycle. In the first quarter, except for prices, China's other economic indicators showed a rapid recovery. Therefore, inflation, as a lagging indicator, is expected to catch up in the future.

From a micro perspective, as pandemic controls were lifted, production and logistics efficiency in the first quarter significantly improved, resulting in a decrease in transportation costs and an increase in goods supply. These are the main reasons for the structural decline in prices. In other words, the recent slowdown of inflation is a one-time adjustment following the relaxation of pandemic controls.

China's monetary policy remains stable in the long run, which differs from the U.S. Federal Reserve's approach. PBOC is forward-looking, deploying "cross-cycle" adjustments at the start of the economic recovery, in contrast to the Fed's slow response to an overheated economy in the past two years. The Fed's failure to reverse its overly loose monetary policy at the very beginning of economic overheating has exacerbated inflation and spread it to other countries. Now, as the Fed tries to control inflation by drastically raising interest rates, it is creating risks of a potential recession.

Compared to the high inflation faced by Western economies today, China's inflation is low, and the real interest rate of the Chinese economy is positive which is attractive to international capital. PBOC's early adoption of "cross-cycle" adjustment to prevent economic overheating is sensible and provides guarantees for stable inflation and currency exchange rate in the long run.

(Cover via CFP)