China's latest attempt to stimulate economic growth is unlikely to be the last

VCG/VCG via Getty ImagesA liquidity injection, of sorts.
  • China’s central bank recently announced a cut in the reserve ratio requirement (RRR) for most Chinese lenders, releasing 1.2 trillion yuan in liquidity for banks to lend and repay maturing loan facilities.
  • Economists don’t think it will be the last measure announced by policymakers to boost economic growth. The prevailing view is there’ll be significantly more.
  • Most see the Chinese yuan continuing to weaken against the greenback, putting it on track to fall to the lowest level in a decade.

Facing an economic slowdown driven by escalating trade tensions with the United States and previous attempts to usher through deleveraging across its industrial sectors, the People’s Bank of China (PBoC) announced on Sunday that it will cut the reserve ratio requirement (RRR) for most Chinese lenders, releasing 1.2 trillion yuan in liquidity for banks to lend and repay maturing loans with the central bank.

It was the fourth cut in the RRR this year, and the largest in terms of the amount of cash it will free up for banks to use.

Nomura

Given the headwinds facing the Chinese economy, economists don’t think it will be the last attempt from Chinese policymakers to sure up economic activity in the period ahead.

Further cuts to the RRR are widely expected, as well as additional fiscal stimulus and potentially a cut in official interest rates.

While Deutsche Bank isn’t expecting the latter to occur, it says alternate measures are likely to be rolled out in the period ahead, including three more RRR cuts in 2019 of 100 basis points each.

It also expects more expansionary fiscal policy, additional tax cuts, increased infrastructure investment, measures to boost consumption as well as the possibility of “fine-tuning of property tightening if sales fall faster than expected”.

Like Deutsche, economists at Nomura don’t expect the latest stimulus measure will be the last.

“In our view, the coming months will very likely bring further policy moves, including more direct liquidity injections via RRR cuts, the MLF [medium-term lending facility] and open market operations (OMOs),” it says.

Nomura also anticipates increasing commercial bank loan quotas, more bond issuance and faster fiscal expenditure, less restrictions on infrastructure investment and tax cuts.

It also says some major Chinese cities may ease or scrap property market restrictions.

Economists at Capital Economics expect stimulus measures to go one step further, forecasting the PBoC will cut official policy rates in order to boost lending.

“We think the upcoming reduction in banks’ required reserve ratio will be followed by cuts to the policy rate to ensure that interbank rates fall far enough to boost lending,” the group says.

“In order to sustain a further fall, the PBOC will need to cut its reverse repo rate.”

It forecasts a 30 basis point decline in this rate by the end of 2018, “allowing the 7-day market repo rate to fall by 50bp this quarter relative to September levels”.

Macquarie Bank agrees with the view that it’s not demand for credit that’s weak at present, but rather the willingness of banks to lend.

“Slumping SHIBOR rates (the unsecured rate that banks lend to each other) since June suggest that the bigger issue is not how much money held by banks, but how much loans banks are willing to make to the real economy,” it says.

Macquarie says that even with the recently announced RRR cut from the PBoC, it says the bank remains “behind the curve” in terms of policy support.

“Policymakers remain reactive not proactive in conducting stimulus,” it says.

“In other words, the loosening is still way behind the curve and investors know that.”

It says a more pronounced growth slowdown will be needed for “policymakers to turn more proactive” and deliver additional stimulus.

While there’s a difference of opinions as to how policymakers may move to support the economy, all expect additional stimulus measures.

At a time when the US Federal Reserve is tightening monetary policy settings given strength in the US economy, the vast majority suggest the Chinese yuan is likely to move towards, and perhaps through, the seven level with the greenback, leaving it at the weakest in a decade.

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