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The People’s Bank of China should take advantage of a window of opportunity to further ease monetary conditions in coordination with fiscal expansion to counter a H1 economic slowdown before a likely rate hike by the U.S. Federal Reserve reduces policy space later in the year, advisors and experts familiar with monetary policy told MNI.
History suggests that the PBOC’s adjustment to its policy rates, such as the cut to its lending benchmark loan prime rate on Dec. 20, and its reduction of the reserve requirement ratio earlier this month, are likely to be followed by further policy moves, said Sheng Songcheng, former director of the PBOC’s statistics department.
The LPR and RRR cuts should flow into lower lending costs in the real economy, particularly for small and medium-sized companies, he said, arguing that it would be “good timing” for China to implement an accommodative monetary and fiscal policy, see: MNI INETRVIEW: China GDP Needs A Fiscal-Monetary Boost-Advisor.
“The Fed will probably raise rates in the second half of next year, which would pressure the yuan and capital flows … we should seize the chance to loosen policy at a moderate pace before that,” noted Sheng, now a professor at the China Europe International Business School.
The possibility of more cuts in policy rates, including those of PBOC’s open market operations and medium-term lending facility, is expected to increase when loans to companies rise, he said.
INFLATION NOT A PROBLEM
Commodity-linked inflation has started to ease, providing more room for an accommodative policy to stimulate credit demand, said Dong Ximiao, chief researcher of China Merchants Finance, pointing to problems emerging in the economic recovery, such as slow government and private investment, weaker manufacturing, and soft domestic demand.
Further easing moves could include more RRR cuts, a five basis-point reduction in MLF rate or another cut in the LPR, Dong said. The timing will depend on the recovery of the economy after the PBOC unlocked a total of CNY2.2 trillion and reduced CNY28 billion of cost for lenders via two RRR cuts so far this year.
Sheng said the first quarter of next year may see heavy downward pressure, but the economy may pick up in the second quarter thanks to stimulus policies and as the pandemic is controlled.
Peng Yuchao, executive director of the Belt & Road Finance Institute at Central University of Finance and Economics, told MNI that “maintaining stable growth” would continue to be a target soon, but there is a still a big question mark over whether looser policy could effectively boost credit demand.
“As the economic outlook of companies turns gloomy, lenders’ willingness to provide loans is weakening. As a result, the performance of Total Social Finance may not be as good as expected,” Peng said.
While both MLF and OMO rates reduction cuts as well as more aggressive open market operations are possible, most stimulus would come from fiscal expansion, including front-loaded infrastructure investment, and structural and targeted monetary tools, according to Peng.
The PBOC will increase the intensity of structural monetary policy tools to support small and micro enterprises as well as individual business owners, according to a statement on the central bank’s website on Saturday following the Q4 meeting of the Monetary Policy Committee.
The PBOC is likely to strengthen the structural monetary facilities, including the newly introduced “carbon emission reduction facility,” in a bid to work as targeted interest rate cuts and boost green development, Peng said, noting that structural tools have helped improve the credit distribution.
Dong suggested the central bank should further increase relending for small businesses to help them cope with the pandemic and inflated costs.
However, Peng warned that it remains uncertain whether the targeted tools could quickly boost investment and solve structural issues.
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