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China’s central bank signals easing as economic risks mount

To aid the economy’s recovery after a sharp downturn in recent months fueled by a property slump.
Image: Qilai Shen/Bloomberg

China’s central bank signaled possible easing measures to aid the economy’s recovery after a sharp downturn in recent months fueled by a property slump.

In its latest quarterly monetary policy report published Friday, the People’s Bank of China removed from its policy outlook a few key phrases cited in previous reports, including sticking with “normal monetary policy.”

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

The report dropped previous phrases to “control the valve on money supply” and vowing not to “flood the economy with stimulus,” signaling more credit support in coming months.

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

China’s CSI 300 Index gained as much as 0.5% Monday morning on expectations of potential loosening, while the 10-year government bond futures contracts gained as much as 0.3%.

Stagflation risk

The PBOC’s more dovish outlook follows growing concerns about the economy flagged by several officials recently. Premier Li Keqiang told a seminar on Friday that China still faces “many challenges” in keeping the economy stable, although this year’s goals will likely be achieved.

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

“The concern for growth slowdown is clearly rising among technocrats at different government agencies,” said Macquarie Group Ltd.’s Larry Hu. “But the key is whether the top leaders share such a view.” The Politburo meeting in December and Communist Party’s Central Economic Work Conference due in the same month, will provide more clues, he said.

Growth could weaken to below 5% next year, according to some forecasts, testing authorities’ resolve to cut the economy’s reliance on the highly-leveraged property sector. In the quarterly report, the PBOC said the economic recovery faces restrictions from “temporary, structural and cyclical factors,” and it’s become more difficult to maintain a stable economy.

What Bloomberg Economics Says…

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

David Qu, China economist

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

Goldman Sachs’ Hui Shan and colleagues said policy interest rates would likely remain unchanged, while Nomura’s Lu said the chance of a reduction in the reserve requirement ratio will rise in coming months.

The PBOC’s report also addressed a number of other factors:

Property

The central bank reiterated it won’t use the property market to stimulate growth, adding that it will work with local governments to maintain the “stable and healthy development” of the market and protect consumers’ rights.

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

Currency

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

In its quarterly report, the PBOC said it will better manage market expectations, help small businesses improve risk management and develop the offshore yuan market. The PBOC may gradually allow a more flexible currency, Xie said in a report Monday.

Fed policy

The PBOC said the normalization of monetary policy in overseas countries, including the U.S., will have limited impact on China, partly because of its cross-cyclical policies and increasing flexibility in the exchange rate. The central bank will continue to base its policy on domestic conditions and strengthen its autonomy, it said.

Inflation

The PBOC reiterated that inflation pressures are controllable overall. China is a major producer in the world with relatively high self-sufficiency, and this will help it cope with the global commodities surge and rising inflation overseas, according to the report.

© 2021 Bloomberg

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