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China's central bank will provide ample liquidity to combat an economic slump led by slowing exports and property sales, including a possible cut in the reserve requirement ratio as growth may slip under 5% in Q4 and lower in 2022, policy advisors told MNI.
A dovish policy stance will be flagged under a "moderate easing" tone in Q4 via the interbank market and open market operations and other tools such as the RRR, said Lian Ping, chief economist at Zhixin Investment Research Institute, predicting GDP growth of 5% or less in Q4 and further slowing in H1.
The drive for easier policy comes as many exporters have stopped accepting orders because of rising raw material and transportation costs, said Lian.
Another spark is the ongoing slowdown in real estate investment on debt repayment failures and concerns over tight regulations. With fewer land transactions, home sales and even falling home prices in some cities, home-related consumption could weaken further, said Lian, see: MNI:China May Loosen Mortgage Rules In Property Slump-Advisors.
An advisor, who is familiar with the PBOC's operations and asked for anonymity, said any RRR cut now would be limited impact to the real economy at a direct pace.
But a cut would lower the lending cost of banks and encourage a boost in credit, particularly when there is CNY2.45trillion of MLF maturing in Q4. It would be a reasonable move to cut the RRR to make it cheaper to repay the large MLF amounts, the source said.
SLUGGISH SOCIAL FINANCE
Both total social finance (TSF) and loan data, forward-looking signals for economic performance, indicate credit demand is sluggish. That creates a strong headwind for the economy in Q4 and into Q1 next year, Lian noted, pointing out that the PBOC has had meetings with banks to push them to lend more.
Outstanding TSF rose by a record-low 10.3% y/y in August, according to the PBOC with yuan loans increased by 12.2%, the slowest pace since February 2020. The September data will be issued later this week, which is expected to continue to be soft.
Zhang Ming, senior fellow and the deputy director of the Institution of Finance and Banking under the Chinese Academy of Social Science, agreed that the money supply and credit are still tight going by the credit data. He added that M1 consecutively fell this year and a blip up of 4.2% in August was the lowest since November 2019.
The economy may surprise to the downside at the end of 2021 and the first half of 2022 if policymakers fail to provide timely support, Zhang said, calling for cuts to reserve requirement ratios or even benchmark interest rates.
NOT SO FAST
But there is concern that another RRR cut so soon after July's move could send signals of a major monetary easing that feed factory-gate inflation and blunt efforts to fight property bubbles, said Wang Jun, an academic committee member at the China Center for International Economic Exchanges.
Wang, also chief economist at Zhongyuan Bank, said instead the PBOC could boost market operations, such as reverse repos and medium-term lending facilities, in order to inject additional liquidity.
The central bank is likely to depend on targeted tools to support weak sectors like small businesses, Wang said. That makes another quick RRR cut seem unnecessary if credit growth continues to lag.
Another advisor pointed out that the PBOC would hold any big policy move, including RRR and rate cuts as the Federal Reserve starts to tighten the policy.
CONSENSUS ON SLOWER GROWTH
Although advisors diverged on the timing and impact of another RRR cut, there is consensus on the gloomy economic outlook after the official PMI fell to 49.6 in September, the lowest level since the start of the Covid-19 pandemic in February 2020.
Zhang estimated GDP would slip to 5%, or even lower in Q4 and 6%-6.5% in Q3, which implies 2021 growth around 8% and the average growth in both 2020 and 2021 of 5.2%, below the potential growth rate of 6%.
As well, other policy goals such as green growth and curbing carbon emissions can ripple unexpectedly through the growth outlook, see: MNI: PBOC Mulls A Financial Plan For China's Big Green Shift.
Recent power outages, and disruptions to coal production, may also impact growth in the near term as the supply-demand gap finds power companies unable to handle soaring fuel prices that cannot be passed on to consumers, said Wang.
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