PBoC easing policy being questioned as economy stabilises

  • Business
  • Wednesday, 03 Apr 2019

The PBoC will likely cut borrowing costs of loans to commercial banks via the medium-term lending facility and may even cut benchmark interest rates in early 2019, Ming wrote.

Beijing: Signs that China’s economy is stabilising have kicked off a debate about whether the central bank should keep injecting liquidity into financial markets, with a former senior official warning of the risk of asset bubbles.

The People’s Bank of China (PBoC) should decide whether to cut the amount of money lenders must hold as reserves only after seeing more economic data, such as first-quarter gross domestic product due April 17, Sheng Songcheng, a former director of the PBoC’s statistics and analysis department, said in an interview with Economic Information Daily published yesterday.

Economists and traders expect the PBoC to cut reserve requirements at least three more times this year. It has used such cuts since early 2018 to manage market liquidity and funnel cash into the slowing economy.

“Cutting reserve ratios when the economy is already stabilised can push inflation higher and guide a large amount of funding to the property market,” Sheng was quoted as telling the newspaper.

Purchasing-manager indexes released in recent days indicate the slowdown in the economy is bottoming out, with full-year growth expected to come in at 6.2% for 2019. Chinese Premier Li Keqiang had hinted that data could exceed expectations.

Even so, market conditions this month could prompt action by the PBoC even if it’s not strictly necessary to support the economy. Maturing loans offered via the medium-term lending facility will potentially suck liquidity out of the market, as will tax payments and local-government debt sales. The drain could add up to 1.5 trillion yuan (US$223bil), according to calculations by Bloomberg News.

There are also risks to the economic outlook.

Producer prices will likely grow by just 0.3% in 2019, according to the median estimate of 15 economists in a Bloomberg survey, down from a forecast of 0.8% in February.

Sinking producer-price growth squeezes companies’ pricing power and makes debt repayment more difficult.

“In our view, it is necessary for the PBoC to inject more long-term liquidity into the economy. Fundamentally, this is needed to support a sustainable expansion in credit to prop up economic activity,” said David Qu, economist.

Which tool the PBoC uses to fill in the liquidity hole is important because it indicates where policy is heading next.

Whereas cutting banks’ reserves requirements can release cheap and long-term funding, the central bank can also roll over MLF loans or inject funding via targeted MLF operations – both of which can lead to higher financing cost for banks than cutting reserve requirements. — Bloomberg

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