Overview
What happened
With concern continuing to grow about the slow pace of the economy’s recovery this year, the People’s Bank of China (PBoC) cut its reserve requirement ratio (RRR) by a quarter point to a weighted average of 7.4 per cent in September, releasing around 500 billion renminbi ($69 billion) of long-term liquidity into the banking system. This will help to meet higher demand for liquidity, primarily from accelerating local government bond issuance since late August, and support efforts to meet this year’s growth target of around 5 per cent.
Our interpretation
The clamor in financial markets for more action to prop up the economy has grown loud over the summer and the decision was in line with expectations. However, in its press release, the PBoC reiterated that policy support should ensure both quality and quantity of economic growth, a signal that counter-cyclical policy support will get stronger to stabilise growth rates.
The easing measures are still in small, piecemeal steps but they are becoming more frequent. Having just cut its benchmark interest rates by 10-15 basis points in August, last week’s move reiterates policy makers more proactive stance.
Officials are stepping up fiscal and property sector easing as well, frontloading spending while relaxing more administrative measures in higher-tier cities to boost property sales. However, we still await more coordinated policy guidance that will tackle the structural issues, be it the problems with local government debt or the long-term outlook for the property sector. We believe that policymakers will communicate with the market on the long-term structural policy outlook in a more comprehensive way at upcoming key meetings, including the possibility of a special National Finance Work conference, as well as the Third Plenum of the new central committee, expected in the final quarter of this year.
Our outlook
For now we think the PBoC will likely continue to ease in incremental steps. We look for another RRR cut and a 10 basis point benchmark rate cut before the end of the year to maintain accommodative monetary support. There is also an increasing probability of the usage of structural monetary policy tools, such as the Pledged Supplementary Lending facility (PSL) to support the property sector by offering financing support to urban re-development projects. These moves to provide monetary stimulus, alongside the variety of fiscal and regulatory easing we have seen over the last two quarters, will on aggregate stabilise growth momentum, likely ensuring that the Chinese economy stays on track to achieve this year’s growth target.
