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The most serious Covid outbreak since 2020 and soaring materials prices in the wake of the war in Ukraine are making it increasingly difficult for China to reach its 2022 growth target, leaving the People’s Bank of China looking for ways to channel cheap money into the economy at a time when credit demand is weak, policy advisors and economists told MNI.

While the PBOC is likely to ease benchmark policy rates and further reduce banks’ reserve requirements in the coming months, possibly once the Covid outbreak has eased, it will also rely heavily on its relending programme, which can provide cheap loans to banks after they have already lent to targeted economic sectors, they said.

The attraction of boosting targeted policy tool quotas has increased at a time when the space for broad monetary easing is constrained by narrowing China-U.S. bond yields, which raise pressure on capital outflows, and by concerns over rising inflation. (See MNI: PBOC Likely To Ease As Lockdowns Hit Output-Advisors)

But more monetary easing of some sort is essential given blows to the economy from strict lockdowns in key cities including Shanghai which could cut growth by over 0.3 percentage point from the around 5.5% targeted for 2022, and from the effect of the war, which could cost 0.2 percentage point, said a high-ranking policy advisor, stressing that these were rough preliminary calculations.

He predicted that Q1 GDP, due for release on Apr. 18, may be around 4.5% year-on-year, from 4% in Q4 of last year.


There is a chance the PBOC could slightly reduce its one-year medium-term lending facility rate to 2.8% from 2.85% on Friday, in a bid to nudge down the one- and five- benchmark Lending Prime Rates to be announced on Apr. 20, said Dong Ximiao, chief researcher at China Merchants Finance.

The PBOC is also likely to cut reserve requirement ratios in coming months, he said, noting that this might be done in a way calculated to boost lending to small business. This would combine with relending operations targeting key sectors, including small and micro business, high tech and the green economy, Dong said.

PBOC relending quotas for small business and agriculture rose by CNY299 billion last year, taking the stock of outstanding relending credit to CNY1.7 trillion. The stock roughly tripled in 2020.

The tool is now being extended to new sectors, including green energy, carbon emission reduction, tech and care for the elderly. Rates on the facilities targeting small business and agriculture were cut by 25 basis points last December, to 1.7% over three months, 1.9% for six months, and 2% for a year.

Targeted tools can provide credit to smaller companies which lack collateral, noted Liu Lei, senior fellow of the Research Center for National Balance Sheet at the National Institution for Finance and Development at CASS, pointing to QE programmes in Japan and the U.S. as evidence that broad easing can do little for corporate lending if firms are reluctant to boost investment.

With liquidity already ample but demand for credit weak, further reductions in benchmark rates or reserve requirements will serve mainly to boost confidence, the high-ranking advisor said, adding that the PBOC’s top task will be to ensure credit flows to where it is needed in the real economy. Real mortgage rates in cities have already fallen, the advisor noted.


The PBOC may wait until the current Covid outbreak fades before taking further broad easing measures, said Guo Tianyong, a veteran banking industry watcher who teaches at the Central University of Finance and Economics. Easing too early may be less effective while lockdowns are snarling traffic capacity as well as hampering consumption, he said, adding that the PBOC will continue to insist on its “prudent” stance as it guides lenders to increase risk appetites.

The central bank will also take note of a potential squeeze on lenders’ net interest margins, said Liang Si, a researcher at Bank of China, noting that PBOC would be cautious about making consecutive policy rate cuts. Interest margins may continue to be narrow as the economy trends more slowly, he predicted.

Net interest margins fell by 10 basis points to 1.75% last year, according to the 2021 annual report of Bank of China.

The government is also increasing fiscal stimulus, but by drawing on existing funds, such as the CNY1.65 trillion from the PBOC’s profits and from the surplus by state-owned companies, keeping the country’s total debt-to-GDP ratio to 268% by the end of the year, up from 263.1% at the end of 2021, said Liu Lei. Issuance of CNY3.65 trillion in local government project-backed bonds should also boost infrastructure spending by more than 10% in 2022, Liu said.

MNI London Bureau | +44 203-865-3829 |
MNI London Bureau | +44 203-865-3829 |

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