Monday, January 24

China’s Central Bank Signals Diminish As Economic Risks Rise


China’s central bank pointed to possible easing measures to help the economy recover after a sharp recession in recent months fueled by a housing crash.

In its latest quarterly monetary policy report released on Friday, the People’s Bank of China removed some key phrases cited in previous reports from its policy perspective, including sticking to “normal monetary policy.”

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That suggests a shift toward more supportive measures, said several major banks including Citigroup Inc., Nomura Holdings Inc. and Goldman Sachs Group Inc.

The report removed earlier phrases to “control the money supply valve” and promised not to “flood the economy with stimulus,” indicating more credit support in the coming months.

“We expect Beijing to soon significantly step up its monetary easing and fiscal stimulus to counter mounting downward pressure,” Nomura’s Lu Ting wrote in a Sunday note.

China’s CSI 300 Index gained as much as 0.5% on Monday morning on expectations of a possible relaxation, while 10-year government bond futures contracts rose as much as 0.3%.

Risk of stagflation

The more dovish outlook from the People’s Bank of China follows growing concerns about the economy recently noted by several officials. Prime Minister Li Keqiang told a seminar on Friday that China still faces “many challenges” in keeping the economy stable, although this year’s goals are likely to be achieved.

Liu Shijin, who sits on the central bank’s monetary policy committee, said in an online forum on Sunday that the economy could enter a period of “near stagflation,” which needs a lot of attention if it occurs.

“Concern about slowing growth is clearly increasing among technocrats in different government agencies,” said Larry Hu of Macquarie Group Ltd. “But the key is whether the top leaders share that view.” The Politburo meeting in December and the Communist Party’s Central Economic Work Conference, scheduled for the same month, will provide further clues, he said.

Growth could weaken to less than 5% next year, according to some forecasts, testing the authorities’ determination to reduce the economy’s reliance on highly leveraged real estate. In the quarterly report, the People’s Bank of China said the economic recovery is constrained by “temporary, structural and cyclical factors” and that it has become more difficult to maintain a stable economy.

What Bloomberg Economics Says …

While investors’ expectation of short-term monetary easing is low, our view is that the People’s Bank of China should take steps to cushion the slowdown in the economy. We maintain our call for a 50 basis point cut in the ratio of reserves required by banks in the coming months.

David Qu, China economist

Any easing measure would likely be aimed at small businesses and green finance, according to economists, similar to measures the People’s Bank of China has already taken in recent weeks, including 200 billion yuan ($ 31 billion). financing for coal projects announced last week. It is also likely to allow credit growth to accelerate next year, according to analysts at Guotai Junan Holdings Ltd. led by Qin Han.

Goldman Sachs’ Hui Shan and his colleagues said that official interest rates would likely remain unchanged, while Nomura’s Lu said that the possibility of a reduction in the mandatory reserve ratio will increase in the coming months.

The PBOC report also addressed a number of other factors:

Property

The central bank reiterated that it will not use the real estate market to stimulate growth, adding that it will work with local governments to maintain the “stable and healthy development” of the market and protect consumer rights.

That suggests marginal structural relaxation in the coming months, according to Tommy Xie, Greater China head of research at Oversea-Chinese Banking Corp Ltd.

Badge

There are signs that Beijing is becoming more uncomfortable with the rally in the yuan, the best performer in emerging markets this year, with warnings to banks to limit speculation in the foreign exchange market.

In its quarterly report, the People’s Bank of China said it will better manage market expectations, help small businesses improve risk management, and develop the yuan market abroad. The People’s Bank of China could gradually allow a more flexible currency, Xie said in a report on Monday.

Fed Policy

The People’s Bank of China said that the normalization of monetary policy in overseas countries, including the United States, will have a limited impact on China, partly due to its cross-cyclical policies and increased flexibility in the exchange rate. The central bank will continue to base its policy on domestic conditions and strengthen its autonomy, he said.

Inflation

The People’s Bank of China reiterated that inflationary pressures are generally controllable. China is one of the world’s leading producers with relatively high self-sufficiency, and this will help it cope with the global surge in raw materials and rising inflation abroad, according to the report.

© 2021 Bloomberg


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