MNI INTERVIEW: PBOC To Cut Rates To Boost Credit - Zhang Bin

The People’s Bank of China will likely reduce its policy rates to boost total social financing (TSF) and support credit demand as it moves to stoke greater core inflation in line with Beijing’s monetary policy direction, a senior policy advisor told MNI in an interview.

The central bank should aim to increase TSF by over 11.4% y/y, or CNY44.8 trillion, from January’s 9.5% and introduce about CNY3 trillion via its pledged supplementary lending (PSL) facility to push the economy to Beijing's 5% GDP growth target, said Zhang Bin, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

Zhang, also a delegate to the 14th National Committee of the Chinese People's Political Consultative Conference – the top advisory body to the Communist Party – suggested authorities should target core CPI at about 2% y/y, compared to February’s 0.6%, by strengthening monetary and fiscal expansion. Feeding credit demand will help address employment, oversupply, market sentiment and debt risk challenges, he added. (See MNI: China To Target 3% CPI Rise Despite Deflation Pressure）

Governments will need to raise CNY11 trillion in debt to ensure a total of CNY40 trillion in spending, he estimated. (See MNI: China Seen Sustaining Fiscal Stimulus As Total Deficit Up)

INFLATION MANDATE

Premier Li Qiang’s government working report published last week following the Two Sessions meeting modified the government's stance on monetary policy, stating it would ensure aggregate financing and money supply remained in line “with the projected economic growth and CPI increase,” a change from last year’s report, which said M2 and aggregate financing should increase “generally in step with nominal economic growth.”

The focus on inflation shows authorities want to prioritise the use of monetary policy to affect prices over stabilising leverage, Zhang argued, predicting the PBOC would add general and targeted easing tools to aid economic recovery. Stimulating weak demand has become the top priority for policymakers over deleveraging, the economist said, noting the risk of deflation would worsen debt levels as economic growth slowed.

China’s headline consumer price index rose 0.7% y/y in February, the first increase after four months of decline. The economy experienced its weakest CPI growth last year since 2009 at 0.2% y/y.

RATE CUTS AHEAD

Last week’s work report noted authorities need to improve the monetary policy transmission mechanism to prevent funds “sitting idle” or circulating within the financial sector, increasing investor concerns the central bank may reduce future liquidity injections.

Zhang said the PBOC must lower policy rates to help channel liquidity into the real economy when credit demand turns sluggish. Interest rate cuts were effective considering real loan and deposit rates, alongside treasury yields, typically fall faster than the pace of policy rate cuts, which helps lower funding costs, Zhang said.

A lower policy rate will improve the whole country’s balance sheet as it eases the debt burden of house buyers, companies and governments, while boosting asset values and market confidence, he noted.

PLEDGED SUPPLEMENTARY LENDING

The PBOC is likely to further increase the PSL, designed to boost the property sector, following last year’s CNY500 billion injection into policy banks.

Aimed mostly at affordable housing, redevelopment of shantytowns in cities and public infrastructure for normal and emergency use, the tool will help shore up investment and consumption, Zhang said.

He called on the PBOC to move rapidly and before fiscal stimulus due to the flexible nature of monetary policy to encourage investors and consumers.