PBOC gives clear signal of easing with promise to boost growth

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China’s central bank has pledged to use more monetary policy tools to stimulate the economy and spur credit expansion, sending its clearest signal yet of an easing bias to bolster confidence. of the market.

The People’s Bank of China “will open up the monetary policy toolbox more widely, maintain a stable global money supply and avoid a credit crunch,” Deputy Governor Liu Guoqiang said at a press briefing in Beijing on Tuesday. .

The central bank will roll out more policies to stabilize economic growth, accelerate actions and take preventive measures, he said. It will respond to common market concerns in a timely manner and stay ahead of the market curve, he said.

Coming a day after the PBOC cut its key interest rate for the first time in nearly two years, the comments reinforce a clear easing bias and underscore policymakers’ determination to support growth in a year of transition. Politics. A sharp decline in the housing market continues to rattle the economy and credit markets, putting pressure on policymakers to step up support to ensure stability.

Read more: Former PBOC official says China has small window to ease policy

The PBOC “sent a loud and clear signal of easing at today’s press conference, in part as policymakers attempt to guide market expectations,” Goldman Sachs economists led by Maggie Wei in a note.

Liu’s remarks suggest the LPR will likely be lowered on Thursday and the RRR could be reduced if growth disappoints, they wrote. Goldman now expects a 50 basis point cut in the RRR in the first quarter and another 10 basis points cut in the key interest rate in the second quarter.

Read more: Spreading China housing debt crisis pushes Xi to ease

Other economists also expect Chinese banks to lower the prime lending rate on Thursday after Monday’s PBOC action. The LPR, which is based on the ratings of 18 banks for their best customers, is impacted by factors including funding costs, market supply and demand as well as risk premium, Liu said. The cut in the key interest rate this week – the medium-term lending facility rate – led to lower rates in the money and bond markets, he said.

What Bloomberg Economics says…

We believe that PBOC Deputy Governor Liu Guoqiang’s remark on “avoiding the collapse of credit growth” was a clear signal that the central bank will step up its efforts to stabilize credit expansion in the face of pressure. down considerably, in particular the financial difficulties of real estate developers.

Eric Zhu, Chinese economist

For the full report, click here.

Speculation is also increasing, the PBOC will cut policy rates again and also lower the reserve requirement ratio for banks.

Liu said the room for further RRR cuts has narrowed, as the average ratio of 8.4% for financial institutions is not high compared to other developing economies or the past. But “there is still space” even though it has narrowed, and the PBOC will reduce the RRR depending on the economy and the need for macro policies, he said.

In response to a question about the possibility of further rate cuts, Liu said the average business loan interest rate was 4.61% in 2021, the lowest level in more than four decades.

The comment suggests there is now less likelihood of another rate cut, although that may happen depending on how the economy performed in the first quarter and the recovery of the real estate sector, Xiong Yuan wrote. , chief economist at Guosen Securities Co., in a note on Tuesday. .

The PBOC’s easing stance contrasts sharply with that of other major central banks like the Federal Reserve, which is expected to raise rates to contain inflation. China’s sovereign yield curve is poised to steepen as the country’s bonds extend a lead on expectations that the central bank will continue to cut official rates as global peers tighten policy.

“The Chinese rates market has yet to fully price in fundamental economic weakness, Covid disruptions and, more importantly, the outlook for further rate cuts,” wrote analysts at China International Capital Corp., including Chen. Jianheng, in a footnote. They see the possibility of yield slippage and recommend investors add leverage and duration in the first quarter.

Alvin Tan, head of Asia currency strategy at RBC Capital Markets, said in a note that the expected policy easing and attractive valuations are “certainly attracting significant flows into Chinese equities this year.”

Stable debt

China’s macroeconomic leverage ratio, or debt-to-gross domestic product ratio, is expected to remain stable in 2022, Liu said. The ratio fell for the fifth consecutive quarter to 272.5% at the end of last year, giving room for political action, he said. He reiterated that the PBOC will align the pace of credit expansion with nominal economic growth.

On the yuan, Liu said China will strive to keep the exchange rate stable, and market and political factors will help correct any short-term deviation from its equilibrium level. The PBOC will allow market demand and supply to play a key role in shaping the exchange rate, he said.

He also told the briefing that the PBOC would not allow one-way movements in the exchange rate, although those comments were not included in an official transcript of the event posted on the central bank’s website. .

Ownership Policy

Property sales, land sales and developer financing have “returned to normal” thanks to the efforts of all parties, said Zou Lan, head of the PBOC’s financial market department, at the briefing. Outstanding home loans reached 52.2 trillion yuan ($8.2 trillion) at the end of 2021, up 7.9% from a year ago and expanding at a faster pace from September , did he declare.

Rules about buying a home are the mandate of local municipal governments, which will adopt policies based on local conditions, Zou said. The PBOC will stick to the principle that “housing is for living in, not for speculation” and maintain a stable and consistent housing finance policy, he said.

Those comments suggest housing finance policies could be eased in cities experiencing a steeper decline in land sales and prices, Guo Lei, chief macro analyst at GF Securities Co., wrote in a note.

Other briefing highlights:

  • Financial institutions must not only welcome customers, but also take proactive measures. They must actively seek good projects to strengthen the structure of the economy

  • The cut in the key rate this week shows that monetary policy is proactive and preponderant, and has boosted market confidence. Reduction will boost borrowing demand and support government bond issuance

  • The five-year LPR – a benchmark rate for mortgages and seen by the market as a signal of the PBOC’s attitude towards the housing market – is also a benchmark for long-term lending in areas such as manufacturing, capital investment and mortgages. . It’s “not just targeted at a specific industry or individual,” Liu said.

  • A total of 261 million individual yuan digital wallets have been set up by the end of 2021, with a transaction value of 87.6 billion yuan ($13.8 billion). PBOC to expand testing in areas including retail transactions, payment of resident fees and government services

(Updates with Ownership Policy section)

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