China could move towards looser monetary policy, but needs to be cautious

People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China, September 28, 2018.

Jason Lee | Reuters

BEIJING – China’s central bank is poised to move cautiously towards easing monetary policy even as the United States is poised to tighten policy.

Going in the opposite direction, the People’s Bank of China will need to strike a delicate balance, as policymakers keep a close eye on inflation and the rising cost of US dollar-denominated debt.

Analysts say easing monetary policy may not manifest itself in overt measures such as reducing the amount of liquidity banks are required to hold as reserves, or the RRR – one of the many policy tools held. by the central bank. Instead, China will likely seek targeted measures.

Here’s why.

On the one hand, the divergence with the United States could have many consequences for the market.

Jefferies analysts said in a note Monday that many Chinese companies, especially real estate developers, have raised large amounts of US dollar-denominated debt. This will become more difficult to repay when the US dollar climbs or US yields start to rise due to the anticipated reduction in asset purchases by the Federal Reserve.

The Fed released a report from its meeting last week that showed the US central bank was on the verge of tightening, potentially as early as next month. The move comes as US policymakers worry about persistent inflation.

China faces the same challenge. The producer price index, a measure of production costs for factories, rose a record 10.7% in September from a year ago.

“Persistent inflationary pressure limits the potential scope of easing monetary policy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

But it has become clearer than ever to many economists that China will need to loosen up.

[China’s] the slowdown in growth has reached levels that policymakers can no longer ignore and we expect gradual easing on three pillars – monetary, fiscal and regulatory.

BlackRock Investment Institute

Third-quarter GDP data released on Monday showed China’s economy has slowed more than expected. A shortage of electricity limited production at the factory. Stricter debt regulations in the real estate sector have squeezed a sector that has contributed to a quarter of China’s GDP.

“The slowdown in growth has reached levels that policymakers can no longer ignore and we expect gradual easing on three pillars – monetary, fiscal and regulatory,” analysts from the BlackRock Investment Institute said in a note Monday.

Earlier this year, Beijing focused more on social issues, such as the high costs of raising children in a country with a rapidly aging population. A regulatory crackdown over the summer included a brutal order forcing after-school tutoring companies to dramatically reduce their hours of operation.

Learn more about China from CNBC Pro

Sun Guofeng, head of the People’s Bank of China monetary policy department, told reporters last Friday that the central bank’s monetary policy remained “cautious.” He said producer prices are likely to remain high, but moderate by the end of the year.

Sun also said the central bank was aware of the Fed’s statement. He did not discuss whether US actions will affect China’s actions and has repeatedly stated that China has many monetary policy tools.

Targeted monetary policy adjustments

Analysts have long pointed out that China’s unique economic structure relies more on an array of monetary policy levers than on a single interest rate.

“Monetary policy will be relaxed appropriately,” Zong Liang, chief researcher at the Bank of China, said Tuesday in Mandarin, according to a CNBC translation.

While keeping overall monetary policy at a “normal” level, he said the central bank could ease policy for specific sectors. For example, the PBOC could help companies struggling to afford the high cost of raw materials. Zong also expects support for stable economic growth to include a boost to infrastructure.

He said China wanted to avoid a situation in which political support would lead to increased costs for ordinary consumers as well as businesses.

While producer prices jumped 10.7% in September from a year ago, the consumer price index remained subdued and only rose 0.7% year-on-year .

When it comes to monetary policy changes, many economists have downgraded their expectations that China will cut the reserve requirement ratio (RRR) by the end of this year.

“We believe that weak third quarter data will prompt Beijing to further slow down its growth restraint policies,” said Aidan Yao, senior economist for emerging Asia at AXA Investment Managers.

Seeing a broader and lasting downturn in the real estate sector is likely [the] the biggest downside risk we need to watch out for.

Francoise Huang

senior economist, Euler Hermes

He said the likelihood of a widespread reduction in the RRR has diminished following the PBOC’s latest comments, but “a targeted decision is still possible if growth weakens further.”

On the fiscal side, Yao expects local governments to deploy about 1.3 trillion yuan ($ 203.3 billion) in cash from special bond sales over the next two months, which is expected to ” provide strong support ”for infrastructure investments.

Getting the real estate market moving

However, Yao noted that Beijing’s tight control over traditional channels of monetary policy implementation – including the housing market – will limit the overall stimulus effect of the policy easing.

The main brake on Chinese growth still lies in the real estate sector. Beijing has stepped up efforts over the past year to reduce the industry’s reliance on debt for growth, pushing down real estate investment and new home sales in September.

“Seeing a broader and lasting slowdown in the real estate sector is probably [the] most important downside risk we need to watch out for, ”said Françoise Huang, senior economist at Euler Hermes, a subsidiary of financial services firm Allianz.

She said policymakers were trying to “phase out the most indebted, or illiquid or insolvent companies, by limiting contagion to other sectors.”

Huang doesn’t expect Beijing to allow the economy to slow so drastically that China can barely meet its 6% GDP growth target this year. Most economists expect growth of around 8% this year.

But with the focus by policymakers this year on solving the economy’s long-term problems, Beijing might not be as keen on boosting growth as much as it used to be, she said. “Their tolerance for the downturn and their tolerance for risk may be higher than in the past. “


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