This month, China’s central bank cut lending rates by just 5 basis points. Unlike during previous slowdowns, the PBOC is keen to avoid flooding the economy with liquidity and starting another boom-bust cycle

China’s economic growth remains on the back foot, with both structural and cyclical factors undermining the economy’s rate of expansion.Unlike during previous slowdowns, such as the global financial crisis of 2008 and 2009, the People’s Bank of China is adopting a painstaking approach to easing monetary policy: it is like an artist honing a marble statue with a chisel, instead of smashing up slabs with a sledgehammer.

In the year ahead, there are good reasons for the PBOC to persist with such a constrained, surgical approach.On November 19, the central bank trimmed its one-year and five-year loan prime rates by 5 basis points, to 4.15 per cent and 4.8 per cent respectively. This adjustment was widely expected, given that the seven-day reverse repurchase rate had also been lowered by 5 basis points earlier that week.Yet the cut was very small, compared with the more usual 25-basis-point adjustments that other major central banks make.The direction of China’s monetary policy is largely expected, since economic data remains weak. The ongoing trade war with the United States is hurting China’s export performance and, more importantly, curbing business confidence and curtailing investment.

Consumers are also starting to become more cautious about buying big-ticket items, especially cars. They are switching to spending more on consumer services, such as health care, education and financial services.Besides, China is facing structural hurdles to growth. Although millions of young graduates are entering the workforce each year, a similar number of people are also retiring. This means that, without labour force growth, workers need to be more productive to continue delivering economic growth.

However, China’s productivity boom is expected to slow as its manufacturing sector matures. This needs to be upgraded alongside the service sector to bring in the next phase of expansion.

Bearing these developments in mind, it would be right for the central bank to maintain loose monetary policy. However, it may need to be mindful of how aggressive it is in providing the economy with liquidity. In the past 10 years, the PBOC has often resorted to pushing a significant amount of liquidity into the banking and financial system to facilitate an economic recovery.

In the aftermath of the global financial crisis, credit growth exploded to 3.5 times GDP growth. A lot of the new loans went to local governments for public projects, as well as to companies for business expansions. The PBOC went on another lending spree in 2012, albeit less aggressively.