China: Eyeing More Stimulus in May

Published on April 19, 2022
SGH Insight
...That said, a senior official concedes, as we have written, that April may indeed prove to be the toughest month for economic growth this year. He goes on to suggest that China’s State Council will step up fiscal, investment, and monetary stimulus efforts if consumption during China’s five-day International Labor Day holiday, starting on May 1, falls short of expectations...
Market Validation
Bloomberg 5/20/22

Chinese banks cut a key interest rate for
long-term loans by a record amount, a move that would reduce
mortgage costs and may help counter weak loan demand caused by a
property slump and Covid lockdowns.
The five-year loan prime rate, a reference for home
mortgages, was lowered to 4.45% from 4.6%, according to a
statement by the People’s Bank of China Friday. That was the
largest reduction since a revamp of the rate in 2019. A majority
of economists surveyed by Bloomberg had predicted a cut by five
to 10 basis points.
The cut is a significant move to boost loan demand, as
consumer and business confidence has been battered by Covid
lockdowns and a downturn in the property sector that has seen a
string of developer defaults and falling home prices. The lower
rate will be applied to new mortgages immediately, while
existing mortgages won’t be repriced until next year at the
earliest.

The People’s Bank of China initially considered a 50 basis points cut in the reserve requirement ratio for banks in its deliberations last week, but the central bank was split in its recommendations.

The three central bank deputy governors, pointing to large-sized commercial banks with high provisioning levels whose provision coverage ratio would be lowered, recommended a 25 basis points cut from April 25. In consulting Premier Li Keqiang and other top economic officials, the political leadership in Beijing also supported the more tempered easing approach proposed by the deputy governors, and that view prevailed.

A senior official explains the leadership’s decision to support a 25-basis point cut RRR on two levels. A more modest cut was seen to reflect that 1 – China’s economic performance in Q1 was better than expected, and 2 – current market liquidity is “relatively sufficient,” and the daily operation of micro, small, and medium-sized enterprises is also “normal.”

The decision to cut only the RRR, and by 25 basis points at that, was met with considerable disappointment by markets that were clamoring for more substantial monetary policy support from the PBoC. Markets have of course also been more pessimistic on China’s growth forecast than has been reflected in the downgraded assessments from Beijing (see SGH China reports 4/8/22, “Modest April Monetary Easing,” 4/12/22, “Challenges to Q2 Growth,” and 4/14/22, “RRR Cut Tomorrow”).

Left unsaid in explaining the PBoC’s decision to hold back on more aggressive easing are more disconcerting concerns in Beijing over a limited room to maneuver on monetary policy due to soaring global input prices, despite China’s still benign CPI inflation basket readings, as well as a global inflationary and tightening cycle that will continue to widen the differential between Chinese and US rates, and potentially lead to capital outflows out of Chinese bonds.

Bond outflows could prove particularly problematic as authorities urge an aggressive stepping up of issuance at the local level while seeking to manage a property sector credit market bust. For all the market calls for aggressive monetary policy easing, the leadership in Beijing remains cautious and firmly opposed to easing measures that could stoke another potential boom-bust cycle.

That said, a senior official concedes, as we have written, that April may indeed prove to be the toughest month for economic growth this year. He goes on to suggest that China’s State Council will step up fiscal, investment, and monetary stimulus efforts if consumption during China’s five-day International Labor Day holiday, starting on May 1, falls short of expectations.

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