October 28, 2024 04:00 GMT
MNI INTERVIEW: PBOC To Cut Rates Further, Target 2% CPI
A prominent policy advisor shares his outlook for China's monetary policy.
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MNI (BEIJING)
The People’s Bank of China will likely guide down the reference lending rate by another 50-100 basis points in 2025 alongside significant fiscal expansion to lift inflation above 2%, a prominent policy advisor told MNI in an interview, noting potential U.S. policy next year to curtail China’s exports could inadvertently lead to further measures that boost domestic demand.
Zhang Ming, senior fellow and deputy director at the Institute of Finance & Banking at the Chinese Academy of Social Science, said the central bank should specifically target a 2% CPI level, as this will boost market expectations and drive the economic recovery.
China has set “below 3%” as its annual CPI target since 2021, but a more specific and mandatory inflation target would better guide policy moves and market expectations, Zhang added, noting the PBOC could also clarify policy would remain accommodative until it met the 2% objective.
The Bank's increased use of price levels in policy discussions has sent a positive signal, he noted. (See MNI INTERVIEW 2: China Fiscal Expansion Crucial, RRR Cut Eyed) But soft domestic demand warranted a significant policy-rate cut, Zhang argued, adding authorities should guide the LPR to about 2.5% from the current 3.1% for the one-year maturity and 3.6% for the five-year-plus rate.
PBOC Governor Pan Gongsheng recently noted the weighted-average reserve requirement ratio (RRR) of financial institutes had fallen to 6.6% after the 50bp cut in September, and signalled potential for a further 25-50bp cut later this year, bringing it closer to the so-call 5% redline.
Zhang, a participant in Primer Li Qiang’s advisory meeting early this month, said limited room exists for further RRR cuts due to financial risk concerns, noting regulators’ tolerance for any bank risk remained weak.
POLICY CHANGES
Asignificant change had occurred within China's monetary mandate, he said, pointing to measures designed to boost asset prices – such as houses and equities – and deliver a wealth-effect driven boost to consumption and investment. (See MNI INTERVIEW: PBOC Moves, Stimulus To Boost Stocks-BOC's Zong)
The PBOC’s new CNY500 billion Securities, Funds and Insurance companies Swap Facility (SFISF), and CNY300 billion relending tool for stock buy-backs, which would provide institutions with risk-free arbitrage, showed the central bank would not tolerate further sharp falls in the equity market, he added.
The stock market reacts faster to favourable policies compared to income and investment, he continued, making it easier to leverage savings, wealth management funds, and foreign capital to enter the market, boosting sentiment.
YUAN & EXPORTS
Donald Trump’s tariff policies could hurt China’s exports next year should he regain the White House, Zhang said, adding this would further reinforce the need for macro policies aimed at domestic demand. “And I don't think it's bad,” he said, noting capital inflows are expected to shore up the yuan should stimulus boost expectations.
The PBOC has adopted a flexible stance on yuan performance in recent months as the daily CNY fixing price has kept in line with expectations, Zhang added. Higher inflation fears should Trump win in November have driven the yuan’s softness against the greenback recently, he said, noting the PBOC should allow the market to operate and only intervene if volatility spikes drastically. A strong yuan is not beneficial in a challenging export environment, he noted.
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