MNI: China Could Seek Moderate Easing Soon To Lift Growth

Chinese authorities could cut interest rates or banks’ reserve ratio soon and shift investment support to projects that boost demand and support shrinking manufacturing activity weighed down by weak expectations and a persistently soft real-estate sector, policy advisors told MNI.

Manufacturing PMI has lingered below the 50 contractionary mark since Q2 2023 – despite a brief spike to 50.2 in September – with the latest December read of 49 its third straight monthly fall. Advisors called on authorities to provide fresh stimulus and not wait until March 5 when Beijing sets the budget deficit-to-GDP ratio and 2024's government bond quota.

“Authorities will not allow an inertial downturn for too long,” said Xu Hongcai, deputy director at the China Association of Policy Science’s Economic Policy Commission. Xu expects the People’s Bank of China to cut the reserve requirement ratio before Chinese New Year, which starts Feb 10, calling for a more aggressive 50bp reduction. The central bank cut the ratio 25bp twice in 2023.

Zou Lan, head of the PBOC’s monetary policy department, told state media this week the central bank may use a range of monetary policy tools to support credit growth. Advisors told MNI last year the central bank will focus more on its targeted facilities to support weak and key sectors, such as property, green growth, high-tech, and local-government debt. (See MNI: China To Pursue Moderate Policy Support In 2024)

Wang Jun, director at the China Chief Economist Forum and chief economist at Huatai Asset Management, expects a policy rate cut in Q1 to stabilise growth against Q1 2023's higher comparison base. Banks have recently reduced deposit rates and real interest rates remain relatively high amid low inflation, making a medium-term lending facility (MLF) rate cut possible, which will guide down loan prime rates, he said. At least two 10bp rate cuts could occur this year, as policymakers aim to match money supply with the country’s growth and price levels, which the government will likely target at about 5% and 3%, he predicted.

China's consumer price index fell 0.5% y/y in November compared to October’s 0.2% fall, the sharpest decline since November 2020, while the factory-gate inflation producer price index (PPI) measure fell for the 14th consecutive month by 3.0% y/y against a 2.6% drop in October.

Xu estimates CPI may hover between 0-1% in 2024, while PPI will likely print circa -1-0%.

GREATER FISCAL SPENDING

Both Xu and Wang believe infrastructure investment will represent a key growth driver in 2024, as real-estate adjustment continues for another two-three years. However, while Beijing’s “three major projects” investment in affordable housing, urban village renovation and public infrastructure may underpin the property sector, it will only bring about CNY1-2 trillion investment a year – not enough to offset the industry's decline.

Home sales last year slid to about CNY10 trillion from CNY13 trillion in 2022 and CNY18 trillion in 2021, according to data by the National Bureau of Statistics.

Xu noted macro policy will have to ensure sufficient funds available to expand investment in more effective sectors before new growth engines mature, which will likely include raising the deficit-to-GDP ratio above 3.5% to allow the issuance of more China Government Bonds.

China’s revised deficit ratio finished 2023 at 3.8% after its initial 3% set in March following the issuance of CNY1 trillion in additional CGBs in October.

Wang believes policymakers may target a 3-3.5% deficit rate in March to allow for greater uncertainty and room for additional easing later in the year. Other fiscal funds, such as local government special bonds and SOE profits – which are reflected in the broad deficit measure – could help ensure the government’s pledge of an overall spending increase in 2024, Wang noted.

Both advisors, however, emphasised the diminishing returns of investing in large-scale infrastructure. Authorities should direct more funding to tap into potential demand and drive consumption. Xu suggested investment in elderly care, low-carbon development and the digital economy to offset property declines.