Analysts: China will cautiously ease monetary policy


Analysts: China will cautiously ease monetary policy

International analysts say that the People’s Bank of China (PBoC) is willing, but cautious, to ease monetary policy, even if the US is on a tight monetary policy.

The People’s Bank of China decided to lower the reserve requirement ratio (RRR) by 50 basis points for all banks from July 15.

Loosening monetary policy is essential

China’s central bank can buck the trend by easing monetary policy cautiously and skillfully, and policymakers keep a close eye on inflation and rising costs. of debts denominated in US dollars.

Analysts say, China can loosening monetary policy, but not through public policy moves such as cutting the reserve requirement ratio (RRR) for commercial banks in July 2021. Instead, China will likely look to targeted policy moves for a number of reasons.

Firstly, the difference in monetary policy with the US can cause many consequences for the market. Investment bank Jefferies (USA) warned that many Chinese companies, especially real estate businesses, have raised a large amount of capital through loans in US dollars. These businesses will find it harder to pay when the US dollar appreciates or US yields increase when the US Federal Reserve (Fed) officially reduces the size of its asset purchase program, including bonds. Treasury bills and mortgage-backed securities (MBS).

This is entirely possible because the minutes of the policy meeting released by the Fed last week showed that the agency is on track to tighten policy, potentially as early as next month, a move expected. hope to cope with high inflation.

China is also facing a similar challenge. The producer price index, a measure of factories’ production costs, rose to a record 10.7% in September from a year ago.

“Persistent inflationary pressures have limited the possibility of monetary policy easing,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. But economists still think China still needs to ease monetary policy as growth slowed in the third quarter.

China’s economy and industrial production both grew below expectations, according to official economic data released earlier this week. Specifically, China’s economy in the third quarter of 2021 grew by 4.9% over the same period last year, while industrial production in September only grew by 3.1%, lower than the forecast of 4.5. %.

Massive power cuts in China have limited factory production. On the other hand, stricter regulations on borrowing by real estate businesses have slowed down the growth momentum of this sector, while real estate and related industries contribute up to a quarter of GDP of the real estate sector. China.

Analysts from BlackRock Investment Research Institute (UK) said: “The growth slowdown (of China – BTV) has reached a level that policymakers cannot ignore and we expect easing to increase in all three pillars: monetary, fiscal, and regulatory.

Last weekend, Mr Sun Guofeng, director of the Monetary Policy Department of the People’s Bank of China, told reporters that the central bank would maintain a “cautious” monetary policy, and forecast a rise in the producer price index, likely likely to return to a moderate level by the end of the year.

Targeted adjustment

Analysts have long argued that China’s unique economic structure relies more on a series of monetary policy levers, rather than the application of a single interest rate. “Monetary policy (of China – BTV) will be loosened appropriately,” predicted Zong Liang, Head of Research at the Bank of China (BoC).

This expert said that, in parallel with keeping the overall monetary policy at “normal”, the Central Bank of China can ease for specific areas. For example, it can help businesses suffering from rising raw material costs and support steady economic growth by boosting investment in infrastructure.

On the other hand, China also wants to avoid the opposite effect of the supportive policy that increases costs for ordinary consumers as well as for businesses, Mr. Zong Liang noted.

China’s producer price index (PPI) rose 10.7% year-on-year in September, but the consumer price index (CPI) only edged up 0.7% year-on-year. As for the possibility of monetary policy adjustment, many economists still expect China to continue to lower the reserve requirement ratio (RRR) for banks by the end of this year.

“We think the weak economic data in the third quarter will prompt Beijing to continue to scale back its growth-constricting policies,” said Aidan Yao, senior economist at AXA Investments. chief”. This expert assessed, the possibility of lowering the RRR rate has decreased after recent comments by China Central Bank officials, but “a targeted policy move is still possible if the speed growth falters”.

On the financial side, Aidan Yao said that local governments in China will increase the supply of about 1.3 trillion yuan ($203.3 billion) in cash from the sale of special bonds over the next two months and the move will “strongly support” infrastructure investment.

However, the expert of AXA Investment Management Fund noted that Beijing’s tightening of control over the implementation of monetary policy through traditional channels, such as the housing market, will limit the impact of stimulus. overall policy easing.

The bigger drag on China’s growth remains in the real estate sector. For restrict status real estate industry growth is heavily dependent on debt, Beijing last year imposed a “three red lines” policy on real estate businesses to reduce the debt-to-asset ratio of this group.

But, Evergrande, The “isolation case” of China’s real estate industry, has crossed all “three red lines” as of the first half of this year, according to investment bank Natixis (France).

Evergrande’s sales also plummeted after Beijing tightened regulations on the real estate industry. The group said its contract real estate sales from early September to October 20 totaled 3.65 billion yuan (US$571.1 million), just 1/ 10 compared to 38.08 billion yuan in August. Evergrande’s accumulated real estate sales from the beginning of the year to October 20 reached 442.3 billion yuan.

Francoise Huang, senior economist at Euler Hermes, a subsidiary of financial institution Allianz (Germany), said: “The long-term and widespread decline of the real estate industry (China) said: – BTV) is probably the biggest negative risk we’ve seen.”

China’s policymakers are trying to “eliminate companies that are most indebted, or illiquid, or insolvent, and limit the contagion effects,” she said. to other fields”.

Ms. Francoise Huang also does not expect Beijing to stand idly by as its economy slows down to the point where China is unlikely to meet its target of 6% GDP growth this year.

In essence, the policy moves China is making this year are aimed at solving the long-term problems of the world’s second-largest economy. Therefore, Beijing may not have the direction to stimulate growth as much as before. “Their ability to accept slower growth and take risks (China – BTV) may be higher than before,” said Ms. Francoise Huang.