SocGen: Much More Is Needed Than The PBoC’s Small And Overdue Rate Cuts

In the wake of yesterday’s PBoC easing Societe Generale note that “the timing is in some sense both later and earlier than we thought. Later, because the economy has been in need of such a move for several months now. Earlier, because we thought the PBoC would first want to be more certain that dollar strength had peaked. If the dollar stops rising from here, we can see 1-2 more such cuts by the year-end.”

• “The rate cuts can help lower lending rates further but far from enough to counter the immense downward pressure from the zero-COVID policy and housing woes. Yet, it is a sign that policymakers still care about growth. So, the thesis of "they will do more" is still valid. However, the likelihood seems to be that the policy response will remain lagged and incremental. The message from July’s politburo meeting suggested as much. There was no mention of topping up government bond issuance quotas, either at central or local levels. The only option proposed was “to support local governments to make full and good use of the special debt cap,” which means a maximum CNY1.5tn extra LGB issuance this year.”
• “Quite clearly, Chinese policymakers have been much more reluctant in providing policy easing to support growth in this cycle than before. One possible explanation is that they understand the unsustainable nature of any credit/investment stimulus, in light of the existing debt problem. But, as we argued in our housing note, a proper debt restructuring programme could help and is the better solution in our view, even though it is much more difficult to execute. Another explanation is that many officials are waiting to see the outcome of the 20th Communist Party Congress, which is due to take place some time between mid-October and mid-November. If so, in the best scenario, we may get proper stimulus - or better still, a debt restructuring package - but only in late November, or later.”