The People’s Bank of China also on Monday said it will reduce most banks’ reserve requirement ratio by 0.5 percentage point next week, releasing 1.2 trillion yuan ($188 billion) of liquidity. Premier Li Keqiang — who last week had signaled Monday’s PBOC move — said later Monday night that China has room for a variety of monetary policy tools, including cutting the RRR.
“The Politburo policy-tone adjustment signaled clearly that the senior leadership has recognized downward pressures on the economy,” UBS Group AG economists led by Wang Tao wrote in a note. While the central bank “reiterated an unchanged ‘prudent’ monetary-policy stance, we think this RRR cut in fact sends a clear signal of monetary-policy easing,” they wrote.
Securities Times, which is under the Communist Party’s newspaper People’s Daily, reported the PBOC also lowered the rate of the relending program for the agricultural sector and small businesses by 0.25 percentage point Tuesday, citing unnamed sources. The last time it cut the rate was July 2020, according to the report.
China will focus on stabilizing macroeconomic conditions, ensuring the economy grows in a reasonable range and that society remains orderly ahead of the party’s key 20th congress meeting later next year, the Politburo said.
The Politburo statement didn’t include the phrase “houses are for living in, not for speculation” — language that the Politburo had used in July and also in an essay by Vice-Premier Liu He last month. The statement in July focused on the need to control housing prices, which was mostly missing from Monday’s announcement.
“Tone on the housing sector is more dovish,” Morgan Stanley China economists led by Robin Xing wrote in a note. “We reiterate our above-consensus GDP growth forecast of 5.5%, seeing a clear policy shift toward countercyclical easing and a more institutionalized stage of regulatory reset.”
Even 5.5% would be less than the 6.7% gains in gross domestic product that China logged on average over the five years through 2019, before Covid-19 struck.
While the latest set of industrial and broader economic data showed improvement, Beijing’s tighter curbs on the property market have led to a slump in construction and worsened a liquidity crisis at real-estate firms including embattled China Evergrande Group.
Shares of Chinese real-estate developers jumped Tuesday on the dovish signal from the central bank, with a Bloomberg gauge of developers rising 3.2% to its highest since late November. Evergrande’s shares surged as much as 8.3%.
What Bloomberg Economics Says…
“We think the reduction would help offset the headwinds facing the economy, particularly in the first quarter of 2022. We maintain our view that an additional 50-100 basis points of RRR cut would come next year.”
— David Qu, economist
To see the full note, click here
The RRR cut is a “regular monetary policy action,” the PBOC said Monday, downplaying any expectations that it was the start of of an easing cycle. “Prudent monetary-policy direction has not changed,” it said, adding that the central bank “will continue with a normal monetary policy, maintaining the stability, consistency and sustainability of policy, and won’t flood the economy with stimulus.”
Some of the money released by the RRR cut will be used by banks to repay maturing loans from the PBOC’s medium-term lending facility, and some of it will be used to replenish financial institutions’ long-term capital, the central bank said. There’s almost 1 trillion yuan worth of the one-year loans maturing on Dec. 15, the day the cut takes effect.
The RRR cut will be applied to all banks except those that are already on the lowest level of 5%, which are mostly small rural banks. The weighted average ratio for financial institutions will be 8.4% after the cut, down from 8.9% previously, the PBOC said in a separate statement.
The reduction will lower the capital cost for financial institutions by about 15 billion yuan each year, which will lower the overall financing cost of the economy, the PBOC said.
Monday’s meeting of the Politburo will be followed by the Central Economic Work Conference sometime this month, which will flesh out economic policy plans for the next year.
That gathering “will likely emphasize downside risk to the economy,” Wang and colleague Ning Jiang wrote. “We expect China to ease policies modestly in the coming months to mitigate the property downturn and avoid a hard landing.”
Both UBS and Morgan Stanley anticipate measures to ease financing for developers. UBS economists expect credit growth to have bottomed in October, with a “modest rebound in the coming months.”
Standard Chartered Plc economists said Monday’s PBOC announcement “increases the odds of a 5 basis-point cut in the loan prime rate” on Dec. 20, though they predict policy interest rates to remain on hold through 2022.