MNI: PBOC Cuts Expected, 5% GDP On Track - Economists

The People’s Bank of China will likely cut policy rates in H2 as economic conditions worsen and policymakers shelve their wait-and-see approach, despite Beijing's continued stance that GDP remains on track to tip 5% growth this year, leading economists told MNI.

“The PBOC needs to cut the MLF [medium-term lending facility] rate once or twice in H2 to stabilise market expectations," said Dan Wang, chief economist at Hang Seng Bank. "Recent data ends consensus that H1's more targeted approach could ignite a broad based recovery.”

Wang added the central bank's recent emphasis on counter-cyclical measures could signal a stronger aggregate approach ahead (see: MNI BRIEF: China CPI To Edge Higher In H2 : PBOC Yi).

Monetary officials cut the medium-term lending rate by 10bp in June (see: MNI: PBOC Cuts MLF Rate By 10bps, Net Injects CNY37 Billion), the first time in 10 months as authorities faced persistent weak demand. June’s CPI read printed at 0.0% y/y, while PPI fell 5.4% and official manufacturing PMI was 49.0, below the 50.0 expansionary level.

“Weak CPI shows huge oversupply and lacklustre demand similar to what China saw in 2015," said Alicia García Herrero, chief economist for Asia Pacific at Natixis, noting the PBOC will likely cut twice in H2 to boost weak demand.

Authorities will introduce stronger monetary and fiscal policy support in H2 as needed to boost the economy toward the 5% GDP target, a policy advisor to the National Development and Reform Commission recently told MNI.

GDP TARGET ACHIEVABLE

Despite recent weak data, Premier Li Qiang recently emphasised China remained on track to achieve 5% GDP growth this year.

Wang said the low base effect and a natural rebound in consumption, housing and investment would contribute greatly to the result.

Herrero agreed, but warned 2024 growth remained a concern. “Without additional fiscal support next year, growth outlook is 4.0%, which could happen given fiscal space is limited,” she noted.

Leading Chinese economist and former Deputy Director of the International Monetary Fund Zhu Min, however, tempered market expectations for stronger fiscal support in H2, citing local government debt as a constraining factor.

Wang believes the upcoming Politburo meeting will likely focus on monetary announcements over fiscal ones, "which is where the policy space remains available." She added authorities will also likely detail policies on local-government debt.