China’s central bank signaled possible easing measures to aid the economy’s recovery after a sharp downturn in recent months fueled by a property slump.
In its latest quarterly monetary policy report published Friday, the People’s Bank of China removed from its policy outlook a few key phrases cited in previous reports, including sticking with “normal monetary policy.”
That suggests a shift in stance toward more supportive measures, several major banks like Citigroup Inc., Nomura Holdings Inc. and Goldman Sachs Group Inc. said.
The report dropped previous phrases to “control the valve on money supply” and vowing not to “flood the economy with stimulus,” signaling more credit support in coming months.
“We expect Beijing to soon significantly step up its monetary easing and fiscal stimulus to counteract the increasing downward pressure,” Nomura’s Lu Ting wrote in a Sunday note.
China’s CSI 300 Index gained as much as 0.5% Monday morning on expectations of potential loosening, while the 10-year government bond futures contracts gained as much as 0.3%.
The PBOC’s more dovish outlook follows growing concerns about the economy flagged by several officials recently. Premier Li Keqiang told a seminar on Friday that China still faces “many challenges” in keeping the economy stable, although this year’s goals will likely be achieved.
Liu Shijin, who sits on the central bank’s monetary policy committee, said in an online forum Sunday that the economy could enter a period of “quasi-stagflation,” which needs close attention if it happens.
“The concern for growth slowdown is clearly rising among technocrats at different government agencies,” said Macquarie Group Ltd.’s Larry Hu. “But the key is whether the top leaders share such a view.”
The Politburo meeting in December and Communist Party’s Central Economic Work Conference due in the same month, will provide more clues, he said.
Growth could weaken to below 5% next year, according to some forecasts, testing authorities’ resolve to cut the economy’s reliance on the highly-leveraged property sector.
In the quarterly report, the PBOC said the economic recovery faces restrictions from “temporary, structural and cyclical factors,” and it’s become more difficult to maintain a stable economy.
Any easing steps would likely be targeted toward small businesses and green finance, according to economists, similar to measures the PBOC has already taken in recent weeks, including 200 billion yuan ($31 billion) of financing for coal projects announced last week.
The State Council, China’s equivalent of a cabinet, said Monday more financial support should be given to smaller businesses to cope with rising supply costs.
It urged the PBOC and the banking and insurance regulator to use various policy tools in a flexible and targeted way to boost liquidity to smaller firms.
Goldman Sachs’ Hui Shan and colleagues said policy interest rates would likely remain unchanged, while Nomura’s Lu said the chance of a reduction in the reserve requirement ratio will rise in coming months. Source.