BEIJING • When China's main stock index plunged about 20 per cent in the second half of June last year, the central bank stepped in with a quarter percentage point interest rate reduction, then cut it again in August after a similar rout.
Now, with the Shanghai Composite Index down 15 per cent already this year, will People's Bank of China (PBOC) governor Zhou Xiaochuan again step in?
While the weekend's inflation reading suggests there is room to act, official signals give reason to pause: Policymakers would not seek strong stimulus or flood the economy with too much investment to boost demand, Premier Li Keqiang is reported as saying.
"We are not going to use 'strong stimulus' or 'flood irrigation' investment to expand domestic demand," Mr Li was cited as saying by the Beijing News. Instead, policies will seek to develop new business models and create new drivers for the economy, he reportedly said.
The central government's website republished that report on Sunday, and the official Xinhua news agency carried it yesterday.
What is not clear is whether that rules out near-term stimulus, or just the extent of any upcoming move.
"Li's statement signals that this year the focus of economic work will shift to the 'supply side' compared to previous demand-side stimulus," said economist Xia Le at Banco Bilbao Vizcaya Argentaria. One reason to delay further rate cuts is that such a move may exacerbate capital outflows, he said.
Mr Li and Mr Zhou face policy conundrums such as how to support the slowest growth pace in a quarter century with a weaker yuan and lower interest rates when such conditions both risk accelerating destabilising capital outflows. Or how to spur new lending with an evolving interest rate system while keeping a lid on debt growth that looms over long-term prospects.
Chinese stocks fell again yesterday, while the yuan gained after the central bank kept its reference rate largely steady for a second day.
"The challenge in moving from one set of rules to another is keeping market expectations from becoming unhinged as they did last year," said the US Treasury's former China specialist David Loevinger. "There's no risk-free road map."
Another key challenge is how to loosen state reins on the yuan and allow enough weakness to spur exports without triggering a depreciation that again roils global markets.
"PBOC must convince investors, especially domestic ones, that it can allow more flexibility in the exchange rate but still maintain overall confidence in the currency," said Mr David Dollar, a senior fellow at the Brookings Institution in Washington.