MNI: PBOC To Cut Borrowing Costs, Support Liquidity In Q1

The People’s Bank of China will ensure ample liquidity and guide down borrowing costs early in 2023 as the economy continues to struggle after a likely slowdown in fourth quarter GDP amid a nationwide surge in Covid infections, economists and analysts said.

The PBOC telegraphed its intention to implement prudent monetary policy in a “precise and forceful way”, use various facilities to “keep liquidity reasonably ample” and “reduce funding costs of market entities”, according to a statement following the central bank’s annual work conference last Wednesday.

The central bank will play a role in boosting consumption and assisting ailing private property developers by lowering credit costs, said Zhu Qibing, chief macroeconomist at Bank of China International, who predicted a loosening of liquidity and lower financing costs as soon as this quarter. (See MNI INTERVIEW: PBOC Rate Cuts Needed As Leverage Set To Rise)

He said a CNY700 billion Medium-term Lending Facility (MLF), set to mature on January 16, and the Loan Prime Rate decision, announced on 20th, should be closely watched to gauge the pace of policy easing. He said targeted policy tools would provide precise support and work in coordination with more broad-based cuts in the reserve requirement ratio. (See MNI PBOC WATCH: LPR Cut Seen In Q1 To Boost Property Market)

The PBOC also needs to ease as cash demand rises ahead of China’s Spring Festival, which starts on January 22. Base money, or M0, is expected to increase by around CNY1.7 trillion in January, which would lift liquidity demand to CNY2.2 trillion, according to calculations by Topsperity Securities.

Topsperity’s chief analyst Xu Liang forecast the PBOC would increase liquidity injections via 7-day and 14-day repos. However, given the central bank cut the RRR in December, there is little chance of another one this month. The Bank may also increase the MLF injection this month, analysts predicted.

An accommodative stance is also necessary as governments have been accelerating debt issuance. Last week, over 16 provinces announced plans for CNY1.1 trillion of bond issuance in the first quarter, including special and general bonds.

GROWTH TO REBOUND

China’s growth took a hit as Covid cases surged after the abrupt removal of the Zero-Covid strategy and as external demand slipped. China’s official Purchasing Managers’ Index showed the manufacturing employment sub-index fell to 44.8 in December, the lowest since March 2020.

Fourth quarter GDP, due on January 17th, would grow 2% y/y, compared with 3.9% y/y in Q3, estimated Zhang Yu, Huachuang Securities chief macro analyst. This would deliver a GDP expansion of less than 3% in 2022. It would be the third quarterly fall in year-on-year GDP since 2010 besides Q1 2020 and Q2 2022.

However, analysts believe growth may have bottomed in December as infection numbers peaked in major cities and stimulus measures were deployed.

Cities would be back to normal in Q1 and the economy is likely to recover at a steady pace, boosted by consumption and infrastructure with help from both fiscal and monetary policy, said Ming Ming, chief economist at Citic Securities.

TAPPING SAVINGS

Another urgent task for the PBOC is to encourage households to spend to stimulate consumption, which will be a key driver of economic growth this year. The latest meeting of the PBOC monetary policy committee noted it will push down credit costs for households, which some analysts interpreted as a signal of lower mortgage and deposit rates.

Household savings surged by CNY2.25 trillion in November, increasing CNY1.52 trillion from the same period last year, according to PBOC data. Savings grew by CNY14.9 trillion in the first 11 months last year, a historical record.

Xu predicted the PBOC would further guide down deposit rates and boost mortgage loans to incentivise household spending.