Analysis: China central bank, under pressure to ease, is hemmed-in by inflation, Fed jitters

  • The economic recovery is looking increasingly shaky
  • PBOC seen easing further in response – policy insiders
  • The PBOC will cut its key lending rate next week to boost demand
  • An upcoming RRR cut is unlikely due to adequate liquidity in the economy
  • The PBOC has limited room due to concerns about inflation, capital flight

BEIJING, Aug 17 (Reuters) – China’s central bank is poised to take more easing steps as a faltering economy continues to cut jobs, but it has limited room to maneuver amid rising inflation and capital flight, policy insiders and analysts worry. said

Analysts now expect a cut in the country’s benchmark lending rate from Monday after the People’s Bank of China (PBOC) unexpectedly cut two key rates this week, showing the economy unexpectedly slowed in July. Read on

But the PBOC is treading a tightrope — trying to support the Covid-ravaged economy by avoiding massive stimulus that could add to inflationary pressures and risk outflows from China’s struggling stock and bond markets as the US Federal Reserve and other economies expand aggressively. Interest rate.

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China’s economy avoided a contraction in the second quarter amid widespread lockdowns and a growing property crisis, which has damaged consumer and business confidence and seen a rebound in Covid cases in recent weeks. Nomura estimates that 22 cities are currently under full or partial lockdown, accounting for 8.8% of GDP.

“Currently, the main problem facing China is that economic growth is slowing down, protecting growth is the top priority,” Yu Yongding, an influential government economist who previously advised the PBOC, told Reuters.

“What we should do is continue to pursue expansionary fiscal and monetary policy, including interest rate cuts,” he said.

China is likely to cut the benchmark lending rate for companies and home buyers, known as the loan prime rate (LPR), in its next setting on August 22.

Shortly before the weak data was released on Monday, the PBOC unexpectedly cut the rate on its medium-term lending facility (MLF) by 10 basis points for the second time this year. The reverse repo rate was also cut by the same margin. Both were already at record lows. Read on

“Rate cuts are not enough – we have to step in with ease,” said a government adviser on condition of anonymity.

However, the central bank is unlikely to cut banks’ reserve requirement ratio (RRR), a traditional tool to boost liquidity, at any given time, as the financial system is already flush with cash, China watchers said.

The central bank has already cut the average RRR level from 14.9% to 8.1% in early 2018, injecting a staggering 9 trillion yuan ($1.33 trillion) into the economy.

The PBOC could instead use structural policy tools, such as low-cost loans, to provide targeted support to ailing small firms and sectors favored by state policies, he said.

The struggles of the world’s second-largest economy come at an inopportune time for President Xi Jinping, who is poised to seek a third leadership term at the Communist Party’s once-in-five-year congress later this year.

Of particular concern, youth unemployment remains stubbornly high, reaching a record 19.9% ​​in July, while the nationwide survey-based unemployment rate eased slightly but remains at 5.4%.

On Tuesday, Premier Li Keqiang said Beijing would increase policy support for the economy and take further steps to boost consumption and investment. Read on

Still, some analysts say modest rate cuts will only help if companies and consumers remain cautious about borrowing more. New bank lending in China fell more than expected in July and was less than a quarter of the level in June. Read on

A shaky recovery

China’s leaders recently lowered the government’s need to meet its annual growth target of “around” 5.5%, which was widely seen as out of reach.

With no sign the government is easing its strict “zero-Covid” policy, some private economists expect the economy to grow by roughly 3% this year, which would be the slowest since 1976, barring a 2.2% expansion in early 2020. The covid outbreak.

But while Chinese policymakers may accept lower growth without publicly revising the target, they have stressed they want to achieve the “best possible results” by counting on fiscal policy measures – particularly infrastructure spending – to boost activity in a politically sensitive year. , sources inside the policy said.

“Monetary policy will be relatively loose to support growth, but the depth will be limited,” Zhu Hongkai, deputy director of the Economic Policy Commission at the state-backed China Association of Policy Science, told Reuters.

Inflation concerns

Meanwhile, signs of consumer inflation pressures – long mild in China – are beginning to emerge.

The July consumer price index (CPI) rose 2.7% from a year ago, the fastest pace since July 2020, even as activity cooled. While the CPI is still in the official comfort zone, the central bank recently predicted that price growth could breach the official threshold of 3% in the coming months and warned against complacency.

In its second-quarter policy implementation report published last week, the PBOC said China should learn from Western central banks’ “misunderstanding” of rising inflation.

“In the short term, China’s structural inflationary pressures may increase, import inflationary pressures still exist, and a number of factors may lead to a gradual return of price increases. We should not take this lightly,” the central bank said.

Still, most economists don’t believe inflation is currently a major headache for policymakers given weak demand.

“Although we face rising inflation due to internal and external factors, this is not the main risk,” Yu said.

($1 = 6.7745 Chinese Yuan Renminbi)

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Reporting by Kevin Yao; Editing by Kim Coghill

Our Standards: Principles of Thomson Reuters Trust.

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