China Stimulus Hopes Rise As PBOC Cuts Rate, Plans Briefing
The stage seems set for the PBOC to lower rates, after the US Federal Reserve finally started cutting last week.
China announced plans for a rare briefing on the economy by three top financial regulators just as it cut one of its short-term policy rates, fueling speculation officials are preparing to ramp up efforts to revive growth.
Authorities announced Monday that central bank governor Pan Gongsheng will hold a press conference tomorrow on financial support for economic development, alongside two other officials. Minutes later, the People’s Bank of China lowered the 14-day reverse repurchase rate, catching up with reductions initiated in July.
Taken together the moves bolster expectations for the PBOC to lower rates, after the US Federal Reserve finally started cutting last week. China’s central bank also recently signaled it was preparing additional policies. A slew of disappointing data in August raised concerns that President Xi Jinping’s government could miss its annual growth target of around 5% without unleashing more support.
The yield on China’s 10-year government bonds fell one basis point to a fresh low of 2.03%, a sign traders are pricing in more monetary stimulus. In the foreign-exchange market, the PBOC raised its daily reference rate for the yuan to 7.0531 per dollar, putting the key 7 level in sight.
“I do expect the PBOC to cut the 7-day reverse repo rate as well as the reserve requirement ratio in the coming months,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, referring to the new benchmark policy rate. The press conference Tuesday will give financial regulators a chance to “shed light on their policy stance,” he added.
Pan used a similar briefing in January to announce a cut to the amount of money banks must hold in reserve — the RRR —- two weeks ahead of time, as authorities tried to halt a $6 trillion stock-market rout. The PBOC governor has displayed a more transparent approach to policy during his first year in the post as officials try to shore up confidence.
Still, a string of rate cuts in recent months hasn’t done enough to stimulate an economy that expanded at the slowest pace in five quarters. The years-long real estate crisis that’s wiped out an estimated $18 trillion in wealth from households has depressed appetite for spending and pushed China into its longest streak of deflation since 1999.
That means real interest rates — which are adjusted for changes in prices — have stayed elevated, weakening the impact of any moderate easing. A plunge in revenue from land sales has also held back fiscal spending, leaving indebted local governments struggling to pay their bills and with little bandwidth to invest in growth-boosting projects.
Economists in a recent Bloomberg poll pinpointed enforcement of the housing rescue package China unveiled in May as the single most-impactful step officials can take to hit the growth goal. So far, uptake has been weak with only 29 of some 200 cities heeding the call to absorb the glut of excess housing.
“It is also needed for the PBOC to guide lower the interest rates on existing mortgages,” said Credit Agricole Chief China Economist Xiaojia Zhi, responding to the Monday cut.
China has a window Wednesday to lower the cost of its one-year policy loans, which officials have downplayed in recent months in favor of short-term rates to guide the market. That means the PBOC might opt to cut its new policy rate before making any change to the medium-term lending facility.
Underscoring the shift in sequence, the central bank in July cut the seven-day reverse repo rate days before it slashed the MLF by the most since April 2020.
The PBOC’s decision to lower the 14-day rate to 1.85% from 1.95% on Monday came ahead of the National Day Holiday that will last seven days from Oct 1. The PBOC typically offers 14-day loans ahead of long break, last doing so in February ahead of the week-long Lunar New Year break.
“A 10bp cut alone is not sufficient to arrest the falling economic momentum,” said ANZ Chief Greater China Economist Raymond Yeung. “A bigger package is needed. Other policy measures in the tool box such as RRR cut, MLF cut and mortgage rate cut will likely be announced.”
