The People’s Bank of China hinted at more policy support for the economy, while also urging patience for the recovery to take hold.
(Bloomberg) — The People’s Bank of China hinted at more policy support for the economy, while also urging patience for the recovery to take hold.
Top central bank officials said they have enough room to ease monetary policy if needed and hinted at possible adjustments to the reserve requirement ratio for banks and further targeted easing of property controls.
“We still have ample policy room to deal with unexpected challenges and changes,” Deputy Governor Liu Guoqiang told reporters in Beijing on Friday. “We need to be patient and confident in the economy’s continued and steady growth.”
China will implement targeted and forceful monetary policy and strengthen counter-cyclical adjustments, Liu said, a repeat of the PBOC’s recent monetary stance. The PBOC will adjust the pace and strength of money supply in a timely manner, push financing costs lower and enhance support for small firms and the green and innovative sectors, he said.
More specifically, Zou Lan, head of the monetary policy department, hinted at using tools such as the reserve requirement ratio and medium-term lending facility to ensure ample liquidity in the economy. The central bank will take policy steps based on “the needs of the economy and the price situation,” he said.
The PBOC is grappling with several challenges, including the looming prospect of deflation, subdued economic growth and a faltering property market. While speculation has grown the central bank will follow through with further easing after last month’s surprise interest rate cut, economists say weak business and consumer confidence are reducing the effectiveness of monetary steps.
On Friday, officials stopped short of signaling cuts to policy rates, suggesting a major adjustment probably isn’t on the cards. Liu said financing costs in the economy declined in the first half of the year after improvements in the transmission of monetary policy. Zou said the central bank will continue to let the “market-based” deposit rate adjustment mechanism play its key role going forward.
‘Very Dovish’
Even so, analysts said the comments suggest more central bank action was likely.
“The overall tone of the presser is very dovish,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. “It clarifies that monetary policy support will be increased.” Officials “clearly expressed” a cut to the RRR, and targeted support for the property sector, private firms and technology, he said.
A reduction in the RRR may come in August or September, Xing said, while there’s unlikely to be another cut to interest rates until the first quarter of next year.
The onshore yuan neared a one-month high against the dollar after the comments, gaining as much as 0.36% to 7.123.
On the ailing property market, Zou told reporters that policies rolled out when the sector was overheated can be “optimized marginally.” Housing measures will also be “tailored” to cities, he said.
Goldman Sachs Group Inc. economists said the comments hinted at “further demand-side property policy easing.” These could include relaxation of home purchase restrictions in major cities, cuts to downpayment requirements and mortgage rates, as well as financing help to developers to ensure the delivery of stalled housing projects, the economists said in a note on Friday.
Goldman also forecasts a 25 basis-point cut to the RRR in the third quarter and a 10 basis-point reduction to policy interest rates in the fourth quarter.
Deflation Risks
Officials also said they would roll out new policy tools if needed to spur the economy. ANZ’s Xing said those measures will likely be targeted toward private firms.
Liu said international experience suggests the economy will take one year to recover from the pandemic, pointing out that it’s only about half a year since China dropped its Covid controls. The fundamentals of the economy’s long-term growth hasn’t changed, he said.
While inflation will remain low in July, it’s likely to pick up in August, with China avoiding deflation in the second half of the year, Liu said. Consumer-price growth will likely trend closer to 1% at the end of the year, he said.
Rising interest rates in the US and high debt levels in the Chinese economy have prompted officials to take a more measured approach to stimulus this year. The yuan is down more than 3% against the dollar this year, although pressure on the currency has eased recently amid signs the Federal Reserve may be nearing the end of its tightening cycle.
Liu on Friday warned investors against speculating on the yuan, vowed to ensure two-way trade in the currency continues and reiterated the PBOC’s policy goal of keeping the exchange rate stable.
“We will let the hands of government and market better play their roles to resolutely avoid big swings in the exchange rate,” he told reporters. “The PBOC has accumulated abundant experience handling the external impact in recent years and we have an ample policy tool kit. We will not lose our focus, neither will we be too laid back.”
(Updates with comment from economists.)
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