The People’s Bank of China (PBOC) building is seen on Tuesday, April 18, 2023, in Beijing, China.
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China’s top leadership surprised markets on Monday by saying it had changed its stance on monetary policy after 14 years, indicating that the country’s economic challenges are deep-rooted but that large-scale stimulus measures are unlikely, experts said.
China hopes to shift its policy stance from “prudent” to “moderately loose” next year – a term they have never used Since the height of the global financial crisis in 2008they later relaxed their stance and held on until 2010.
Macquarie chief economist Hu Lali said this is the first time the current leadership has admitted that monetary policy should be loose, laying the foundation for “a new monetary easing cycle.”
“The tone suggests policymakers are deeply concerned about the economic outlook given weak domestic demand and the threat of another trade war,” Hu added.
Despite a series of stimulus measures since late September, recent economic indicators show that the world’s second-largest economy still faces deflationary pressures amid tepid consumer demand and a prolonged slump in the housing market.
Wang Tao, head of Asia economics and chief China economist at UBS Investment Bank, said that “the potential room for monetary easing (now) is much more limited than 15 years ago” and he expects “the policy rate cut will exceed 50 basis points.” Year.
Policy changes
Teneo managing director Gabriel Wildau said the Chinese government launched “historically large-scale monetary stimulus measures in response to the global financial crisis.”
Beijing has 4 trillion yuan ($586 billion) announced The November 2008 package—approx. Accounted for 13% of China’s GDP at that time — Sustain growth and eliminate economic impacts Worst global recession in more than 70 years.
In 2008, when the authorities adopted a “moderately loose” policy stance, the People’s Bank of China The one-year loan benchmark interest rate was reduced by a total of 156 basis points A former official from the Monetary Policy Department of the People’s Bank of China clearly stated that during the easing cycle, the cash reserve ratio will increase by 1.5 percentage points. Official media “Economic Observer”.
Last month, China unveiled a five-year stimulus plan Total 10 trillion yuan Address the local government debt problem while saying it will provide more economic support next year. That only accounts for about 2.5% of China’s annual GDP, Lu Ting, chief China economist at Nomura Securities, said in October.
Morgan Stanley economists said the debt swap program needs to be significantly expanded to offset local government financial instrument debt, which is close to half of the country’s GDP.
Morgan Stanley expects the central government fiscal deficit to expand by 1.4 percentage points next year as the government increases borrowing to support the economy. China has maintained its central government deficit target at 3% this year.
People’s Bank of China restrictions
People’s Bank of China has been cut The Federal Reserve has been adjusting key interest rates since the end of September after cutting interest rates sharply by 50 basis points in mid-September to start its easing cycle.
Fed rate cuts provide room for China Reduce domestic borrowing costs It will not cause the RMB to depreciate significantly. However, China’s central bank has refrained from taking more drastic interest rate cuts due to concerns about possible capital flight if the interest rate gap between China and other countries widens.
Ensuring growth momentum is more important than stabilizing the exchange rate.
penbruce
Chief Economist, JLL Greater China
Wang Ju, head of foreign exchange and interest rate strategy for Greater China at BNP Paribas, said the tone of Monday’s Politburo meeting reinforced market expectations that the People’s Bank of China may cut its main interest rate by 40 to 50 basis points to close to 1% before the end of 2025. .
Bets on further interest rate cuts fueled the long-term rebound Chinese government bonds pushed the benchmark 10-year yield to a record low on Tuesday.
Peng Xiaolong, chief economist of Jones Lang LaSalle Greater China, told CNBC that although monetary easing may put depreciation pressure on the yuan, “ensuring (economic) growth momentum is more important than stabilizing the exchange rate.”
Pang expects the central bank to cut the deposit reserve ratio (RRR), a key lever for regulating liquidity, within a month.
Not a “Bazooka”
UBS’s Wang added that more details on Beijing’s macro policy plans will be revealed at the annual economic work conference, which is reportedly underway and will end on Thursday.
Still, details of most key policy targets and stimulus measures won’t be announced until next March’s National People’s Congress, she added.
Investors and economists are watching for any specific policy next steps, especially additional fiscal support and direct consumption incentives.
Wildau said Monday’s tougher language did not mean “a bazooka-style stimulus is coming immediately,” and he believed senior leaders would roll out new stimulus in an “incremental, data-dependent manner while retaining some ammunition” to In response to possible tariffs imposed by the United States next year.
Wang said reviving household consumption is a top priority for policymakers and predicted the government would more than double the trade-in program to more than 300 billion yuan to stimulate domestic spending.
China has in July Announcing an allocation of NT$300 billion (US$41.5 billion) ultra-long-term special Treasury bonds support trade-in and equipment upgrade policies to boost consumer demand.
Liu Yang, chief economist at Oxford Economics, said in a report on Wednesday that apart from trade-in programs, existing fiscal stimulus packages have little emphasis on stimulating consumption, which is key to economic reflation, and stressed that China will Continue to face deflation.
