MNI INTERVIEW: PBOC To Boost Targeted Facilities - Advisor

The Peoples’ Bank of China will continue to inject funds into its targeted facilities, such as the Pledged Supplementary Lending programme, to shore up infrastructure and property, while Beijing may issue additional government bonds to cover a fiscal gap later this year, a prominent policy advisor told MNI in an interview.

The central bank last year granted the PSL facility a CNY500 billion quota to policy banks, with more expected this year, said Zhang Ming, senior fellow and deputy director at the Institute of Finance and Banking at the Chinese Academy of Social Science.

According to the PBOC’s website, CNY350 billion was used in December – its largest rise since November 2022 – leaving CNY150 billion available. The targeted PSL provides loans to policy banks to invest in infrastructure and property projects.

Zhang expects policy banks to use the remainder of the quota soon and leverage any additional funds – if launched effectively – four-five times more into infrastructure, and property investments, which will aid demand recovery and boost commodity prices. The advisor estimated GDP will likely grow about 5% y/y in 2024, compared to 2023’s expected 5.3% growth. (See: MNI INTERVIEW: Support Needed To Boost Future China GDP-Advisor)

The National Bureau of Statistics will unveil last year’s GDP result next Wednesday.

ADDITIONAL CGB

After initially setting the deficit-to-GDP ratio at 3% in March 2023, Chinese authorities increased it to 3.8% in October, raising China Government Bond issuance by CNY1 trillion. Beijing will confirm 2024’s target in March, but some experts have called for a higher ratio near 4%, while some advisors want it reduced closer to 3% to ensure fiscal sustainability.

Zhang expects fiscal authorities may have to issue additional government bonds again later this year to fill a funding gap should authorities set the fiscal deficit ratio lower and target 5% GDP growth.

Chinese media reported on Thursday local governments are preparing projects to take advantage of the possible issuance of long-term special treasury bonds and finance food, energy and industrial chain security and urbanisation projects.

MONETARY EASING

Zhang said soft domestic demand will continue to trouble the economy, dampening credit expansion and dragging down inflation. Therefore, fiscal authorities must first move to boost demand to increase the effectiveness of monetary policy, he argued.

The PBOC will maintain ample liquidity and may cut the reserve requirement ratio twice by 50bp, but the reduction will target lenders whose RRR remains above 5%, Zhang said, adding a policy-rate cut could occur to support fiscal expansion, while structural facilities increase. (See: MNI: China To Pursue Moderate Policy Support In 2024)

The Consumer Price Index will rise to 1-2% y/y thanks to improved demand, while the Producer Price Index (PPI) will edge up in a range of 0-2% as energy prices rise, Zhang said. He suggested the PBOC should set its CPI target at 2% for 2024, compared to its typical “around 3%”.

China's CPI 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 PPI measure fell for the 14th consecutive month by 3.0% y/y against a 2.6% drop in October, which has stoked deflation concerns.

PROPERTY RECOVERY

The property sector’s recovery remains a significant uncertainty for the broader economy, Zhang noted. Real-estate development investment will likely rise from November’s 9.4% year-to-date decline to an about 5% fall, or it could turn positive, he added.

“We must prevent a fast drop of the real-estate sector considering its deep link and big contribution to the wider economy,” he said.

Even though lenders have guaranteed large developers’ liquidity, risks in mostly private small- and medium-sized companies remain. “Compared with the risk of local-government debt, I am more worried about that of the property sector, considering the former can get more help from central governments and lenders,” he argued.

The potential exists for property investment to expand, such as through affordable house construction and updated infrastructure projects in cities, even though the peak of the sector has passed, Zhang commented.