MNI INTERVIEW: PBOC To Ease Further In 2025 - CITIC's Ming
MNI (BEIJING) - The People’s Bank of China is likely to ease monetary policy further in 2025 as inflation remains weak, introducing new tools to support real estate, local-government debt restructuring and bank recapitalisation in line with government fiscal policy, a former PBOC official told MNI.
The PBOC will proactively provide liquidity via reserve requirement ratio reductions and open-market operations, as local governments issue fresh debt for the central government-backed debt swap scheme, said Ming Ming, now chief economist at CITIC Securities, in an interview. (See MNI: PBOC To Expand Tools, Cut RRR As Fresh Bonds Hit Market)
Medium- to long-term liquidity shortfalls throughout 2025 are likely to require total RRRs cuts of 75-100 basis points, while short-term gaps will be offset through reverse repos and treasury-bond trades, he said. The pace of RRR cuts will align with government-bond issuance, said Ming, who expects reductions of 100bp between now and the end of next year.
The country will issue as much as CNY2.8 trillion in local government special bonds in 2025 to swap “hidden” local government debt, according to Ministry of Finance plans. Most of the off-balance sheet liabilities are likely held by financial institutions, particularly banks.
“Looking ahead in 2025, monetary policy will build upon some of the goals established since 2024, while placing greater emphasis on coordination with fiscal policy to support risk prevention and mitigation,” Ming said. “The central bank is likely to work alongside fiscal measures to support local government debt swaps, bank capital replenishment, and revitalisation of idle land.” (See MNI PBOC WATCH: Rates On Hold, More Easing Eyed In 2025)
The PBOC has reduced the RRR by 100bp so far this year, taking the weighted-average requirement to 6.6%. Governor Pan Gongsheng said in September the PBOC would cut the ratio by another 25-50bp later this year if needed.
The 7-day repo rate has been reduced by 30bp so far in 2024, helping to lower the loan prime rate by 35bp for the one-year maturity and 60bp for over five years.
COMPLEX ENVIRONMENT
Ming said anticipated Federal Reserve rate cuts will create favorable conditions for the PBOC to ease, though U.S. trade policy and a complex external environment will have the opposite effect. While the 7-day reverse repo rate will likely be lowered twice in 2025 in Q1 and in Q3 by 30bp in total, a more significant LPR reduction is also likely an option, he added.
The PBOC will ensure the yuan remains stable, in line with its mandate, he continued, but it will likely fluctuate next year against the dollar as China’s trade surplus and capital inflows face pressure from potential fresh U.S. tariffs.
December’s Central Economic Work Conference will provide guidance on next year’s macroeconomic policies, and will be key for determining the outlook for the currency and other variables, he said, adding that China will likely make new efforts to attract foreign capital and develop its capital markets further to stabilise capital outflow over the longer run.
In addition, officials will continue to reform China’s monetary-policy framework, optimising short-term rate control and improving the long-term rate transmission mechanism, Ming said.
SOFT INFLATION
CPI inflation, at an annual 0.3% in October versus the 3% target, is unlikely to show a significant upward trend in 2025, peaking by late Q1 or early Q2 helped by base effects as pork prices fall, though non-food prices may rise month-on-month thanks to measures to boost consumption, according to Ming.
Producer prices, which sank by 2.9% in October, the steepest fall since November 2023, should fluctuate but continue their two-year decline. The continued slowdown in growth of the M1 measure of money supply suggests persistently weak appetite for investment, making any substantial rebound in PPI in H1 2025 unlikely, Ming said, pointing to downward price trajectories for major commodities like crude oil, steel, and non-ferrous metals.