MNI: PBOC Easing More Likely In H2 After Potential Fed Cut

Potential U.S. Federal Reserve rate cuts later this year, or even a further hold, will give the People’s Bank of China greater ability to ease in the second half, while the Bank of Japan’s recent policy change will have little immediate impact, policy advisors and officials told MNI.

The PBOC has typically eased tactfully due to the yuan’s weakness against the U.S. dollar, a former PBOC official told MNI, noting any Fed cut or hold in H2 will generate benign conditions and aid the central bank's various tasks, such as boosting domestic credit demand, channelling liquidity through the economy, preventing risks and cultivating new growth drivers. (See MNI INTERVIEW: PBOC To Cut Rates To Boost Credit - Zhang Bin)

The impact of the BOJ’s move away from easy policy will remain small as uncertainty over its future rate-hike strategy exists, however, the bank’s move had reshaped the global monetary policy landscape and made China the only major economy struggling with weak inflation, he warned. (See MNI: China To Target 3% CPI Rise Despite Deflation Pressure)

POLICY TRANSMISSION

Liu Ying, director of Research and Cooperative Department at Chongyang Institute of Financial Studies of Renmin University of China, told MNI the PBOC’s accommodative stance will extend to 2025. The central bank will have to expand its balance sheet to shore up the economy and deal with risks such as indebted local governments and the sluggish property market among others.

She estimated the Bank would cut the reserve requirement ratio twice later this year, reduce policy rates once or twice, and implement cheap targeted tools. But the PBOC must consider how it will channel further liquidity down to the real economy, rather than having it cycle through the banking system pushing up leverage or flowing into property and equity markets, she warned.

Authorities should increase relending programmes aimed at small business and property from the current CNY1.8 trillion and CNY200 billion respectively, while support to manufacturers’ equipment upgrades should also rise from CNY200 billion, she said. Additional targeted facilities should also support new economic drivers, Liu added.

However, Teng Tai, director of Wanb New Economy Research Institute, argued targeted tools may not incentivise banks to lend to riskier small and medium private borrowers, as they prefer stable state-owned companies. The PBOC’s easing over recent years has been too conservative as it followed the old model of preventing inflation, asset bubbles and a sharply weaker yuan, Teng said. All these mandates have shifted in the opposite direction, he added, noting a weaker yuan benefits China’s exports, which is key for the economic recovery.

Neutral and structural monetary policy is not in line with China’s economic reality and the PBOC should not hesitate to cut interest rates considering the economic slowdown, he explained, adding no basis exists for high loan and deposit rates.

DIRECT FINANCING

Authorities must develop direct financing channels, such as bond and equity markets, to prevent idle funds, advisors told MNI.

Potential exists for China’s direct financing markets, noted Liu, adding the channels account for only 20-30% of the country’s total financing funds, much lower than some developed market economies. Bond and equity markets need reform to expand, meet fund demand and reflect real costs, she added.

Liu predicted the central bank may also step in to bail out the equity market early this year to stabilise confidence and protect investors.

The PBOC’s “other assets” section within its balance sheet jumped by CNY86 billion in January, the largest monthly increase since July, 2015 when the country experienced an equity market crunch. The section can include assets obtained from other operations of the central bank, such as international financial organisations, funds in transit, or assets awaiting clearance, and also contains returns from equity investments.

Meanwhile, PBOC loans to non-bank institutions increased CNY404.5 billion in February, also the largest since July 2015, which has aroused wide attention among investors speculating on potential PBOC moves to shore up China's equity market.