MNI INTERVIEW: PBOC Rate Cuts Needed As Leverage Set To Rise

The People’s Bank of China should cut its policy rates to lower the cost of new government borrowing needed to fund additional spending, with an increase in China’s macro-leverage ratio justified by the need to support annual GDP growth of 5-5.5% in 2023, a senior policy adviser told MNI.

“Monetary policy needs to remain accommodative to support fiscal expansion next year via reducing the cost of debt issues,” Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Science, told MNI in an interview.

“Considering rates in the wholesale market remain low, I think cut to policy rates are more effective than a reduction in the reserve requirement ratio (RRR) because lower interest rates would not only reduce the cost of new debt but also the repayment burden on the outstanding debt, and that would then boost credit demand,” he said.

The most urgent task for Chinese policymakers is normalising economic and social activities to drive a recovery in growth, for which strong credit demand is necessary, said Zhang, who is also the deputy director of the National Institution for Finance & Development.

He expected the PBOC would implement several cuts to its policy rates and reduce the RRR one or two times, a move that would free up additional capital for banks. Meanwhile, fiscal authorities would likely raise the fiscal deficit-to-GDP ratio to 3.2% from 2022’s 2.8% and increase the quota for special local government bond to CNY4 trillion from this year’s CNY3.65 trillion. (See MNI PBOC WATCH: LPR Cut Seen In Q1 To Boost Property Market)

In addition to traditional debt tools, special treasury bonds – which are issued for particular purposes and are not included in the budget – are a policy option. “If the quota of government bonds isn’t expanded, then special treasury bonds of at least CNY1 trillion should be issued next year to help local government operations,” he said.

The central bank would support policy banks—China Development Bank, Agricultural Development Bank of China and Export-Import Bank of China—to raise as much as CNY1 trillion via bond issuance to support major infrastructure projects, up from CNY600 billion this year. “The funds can be used to replenish the capital for projects, which could leverage bank credit,” Zhang explained.

CONSUMPTION REBOUND

Consumption and investment will be the main drivers of a recovery in 2023, while exports soften. Zhang predicted retail sales, a gauge of consumption, would expand 5% year-on-year in 2023, compared with a contraction of 0.1% in the first 11 months of 2022.

Robust consumption would boost manufacturing investment, but property investment would likely remain weak as sentiment among developers continues to be downbeat despite an easing in regulations to promote refinancing, he said.(See MNI: China's Property Financing Plans Confront Collateral Test)

Infrastructure investment would continue be an engine for the growth, particularly in the first half of 2023 when consumption and manufacturing are still recovering.

LEVERAGE TO RISE

China’s debt-to-GDP ratio is expected to rise as more debt is issued to sustain credit demand. The macro-leverage ratio increased to 273.9% at the end of September, up 10.1 percentage points from the end of 2021, according to NIFD’s calculations.

The household leverage ratio rose 0.2pps to 62.4%, corporate leverage rose 7pps to 161.8%, and government leverage rose 2.9pps to 49.7% in the first three quarters of 2022.

Zhang forecasts the household leverage ratio would remain steady as people are reluctant to borrow given their income and wealth shrunk over the three years of Covid disruption, and their outlook for the future is not optimistic. Mortgages, the biggest portion of household debt, is unlikely to increase at a fast pace given the downbeat outlook for the property market. However, the leverage of government and non-financial companies would see a rise following debt expansion, he said.