China to Ramp Up Monetary Stimulus as Economic Outlook Darkens

(Bloomberg) -- China signaled more monetary stimulus was on the cards, including a likely cut to the reserve requirement ratio for banks, as it ramps up support for an economy under strain from surging Covid cases and more lockdowns. 

The State Council, China’s cabinet, said in a statement Wednesday that monetary tools will be used “in a timely and appropriate manner” to maintain reasonably ample liquidity. It also called on “greater support” for bond financing for private firms, a policy mainly targeting cash-strapped property developers. 

The People’s Bank of China usually cuts the RRR -- the amount of cash banks must keep in reserve -- within days of such statements by the cabinet. The PBOC last cut the RRR in April, by 25 basis points for most banks, a smaller reduction than economists had expected.  

China’s economic outlook is darkening as Covid cases climb to a record and cities tighten restrictions to combat the spread of infections. Although officials are trying to recalibrate the Covid Zero policy to minimize the economic and social damage, the recent surge in cases has seen major cities like Beijing, Chongqing and Guangzhou tighten controls. 

That’s dampening consumer spending and causing disruption to businesses, weighing on the growth outlook. Nomura Holdings Inc. on Thursday cut its forecasts for China’s economic growth for this year and next, citing a “slow, costly and bumpy” reopening of the country.

Goldman Sachs Group Inc. economists said the State Council’s meeting was a “response to increased growth downward pressures due to widened Covid curbs on the back of the rising local case number.” They also see the chance of targeted interest rate cuts to guide banks to further lower funding costs for small firms.

What Bloomberg Economics Says...

The State Council’s call for a cut in the required reserve ratio for banks is not a surprise -- we’ve expected a move by year end. China is struggling with sluggish growth, decelerating credit and Covid flareups that are prompting curbs on activity. Our analysis of liquidity conditions pointed to the need for an RRR cut.

David Qu, China economist

For the full report, click here.

China is also taking more concerted steps to boost an ailing property sector, with the recent announcement of a 16-point rescue package for the sector. The PBOC and the banking regulator this week asked banks to stabilize lending to developers, a call that’s been heeded by major state-owned banks, who are offering at least 220 billion yuan ($31 billion) in new credit to property developers. 

Most analysts had been expecting a RRR cut by early next year. The move, which might replace some maturing policy loans, would unleash liquidity into the interbank system and reduce banks’ funding costs. The cost of issuing one-year negotiable certificate of deposits, a key form of banks’ short-term debt, spiked to the highest in nearly 11 months last week, underlining the liquidity stress faced by lenders.

A cut to the RRR, especially a targeted one, could “ensure financial and credit support to the real economy and provide stronger support to several sectors” including households that suffered most from Covid, said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc.

The cabinet also said the foundations of recovery should be consolidated and economic growth kept in a “reasonable range,” according to the statement published by the Xinhua news agency. It pledged to help the development of online platform companies and ensure the smooth operation of e-commerce operators and delivery network.

The PBOC has become increasingly confident in setting monetary policy that diverges from the rest of the world, having allowed for more flexibility in the yuan’s exchange rate and refined capital controls in recent years. Cooling US inflation, meanwhile, has given the Federal Reserve room to potentially start slowing down steep interest-rate hikes, which is also helping limit the yuan’s weakness against the dollar. 

The monetary stimulus may not be enought to spur the economy though as long as Covid disruptions continue, Nomura’s economists said. 

“The RRR is likely to only have a limited positive impact, as we believe the real hurdle for the economy lies in local officials’ more zealous implementation of Covid restrictions rather than insufficient loanable funds,” the economists wrote in a note. “Ending zero Covid as soon as possible is the key to raising credit demand and bolstering growth.”

--With assistance from .

(Updates with additional details)

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.