context: ‘Neutral’ was removed from the description of monetary policy at the end-2018 Central Economic Work Conference. Consistent with this stance, the 2019 government report had three new changes: M2 and aggregate social financing to keep consistent with nominal GDP growth, lowering real interest rate, and 30 percent micro enterprise loan increase for large state-owned banks. If investment opportunities are not improved, the easing would either be ineffective or translate into more bad loans.

While further reserve ratio (RR) cut is almost certain, given the high existing reserve requirement, interest rate reduction is a possible countercyclical option in 2019, says Liu Yuanchun 刘元春 Renmin University vice president. M2 growth is still lower than nominal GDP and People’s Bank of China (PBoC) has not expanded its balance sheet, so cutting RR or the interest rate does not mean massive stimulus, argues Liu. As major economies suspended monetary normalisation, 2019 policy space is relatively abundant, adds Liu.

Matching M2 and aggregate social financing with nominal GDP growth is more specific than the previous expression of ‘reasonable growth’, says Lian Ping 连平 Bank of Communications chief economist, and currently 8.1 percent M2 growth is still lower than 9.7 nominal GDP growth. Lu Zhengwei 鲁政委 Industrial Bank chief economist thinks this expression only means monetary policy choice should facilitate development goals, because M2 becomes a weak indicator.

Real interest rate has not been referenced in government work reports for over ten years. Lian thinks PBoC will be prudent in cutting benchmark lending and deposit interest rates considering the already low money market rate and spillover effect on exchange rate and capital flows, but policy rates may drop.

The requirement for 30 percent micro-enterprise loan increase demonstrates central government’s decisiveness in solving private business financing problems, but it is hard for banks to ensure quality loans, says Lian.

The report mentioned, for the first time, ‘spillover risks’ in the financial risk control arrangement, pointing to global financial market uncertainties and US–China trade war truce, says Liu Ying 刘英 Renmin University Chongyang Institute for Financial Studies director.