As economic crisis deepens, China plans to ease lending

A clear call for China to reduce the number of cash banks it holds as reserves and increase lending has raised hopes of an imminent policy easing, but economists say even with credit easing, a deep recession is unlikely. Say that might not be enough to repel prospects. Growth in the world’s second-largest economy has slowed since the start of 2021 as traditional economic drivers such as housing and consumption stalled. Exports, the last major driver of growth, are also showing signs of slowing. Recently, the biggest disruption to activity from its COVID-19 outbreak, the largest since 2020, and strict lockdown measures have raised the likelihood of a recession, some economists have said.

This will free up more than 1 trillion yuan ($157 billion) in long-term funds for banks to use to facilitate lending. An op-ed in the State Securities Times said April 15 was the time to watch. China is due to release March industrial production and retail sales data on Monday, which is expected to reflect the impact of COVID restrictions and first-quarter gross domestic product (GDP). But some analysts have questioned the effectiveness of an RRR cut now, due to a lack of demand for credit, as factories and businesses pause while consumers remain cautious in a highly uncertain economy. .

After Wednesday’s meeting, the State Council or cabinet said it should use monetary policy tools in a timely manner, including cuts in banks’ required reserve ratios (RRRs). The last two RRR rate cuts for 2021 were each announced two to three days after being pronounced by the Council of State. “We expect the PBOC to cut its RRR by 50 basis points and possibly cut rates,” Goldman Sachs said in a statement Thursday. Most private forecasters now expect the RRR to decline by 50 basis points (bps).

According to Nomura, the transmission channels for conventional RRR and rate reductions are severely obstructed due to COVID-related blockages and logistical disruptions. “When households scramble to store food and private businesses prioritize survival over expansion, demand for credit is weak,” Nomura analysts said in a note. “With so many lockdowns, roadblocks and housing restrictions, the most concerning issues are mostly on the supply side, and simply adding loanable funds and cutting lending rates slightly will probably not be enough. not effectively stimulate final demand.”

Nomura says China faces a “growing risk of recession”, with as many as 45 cities now implementing full or partial lockdowns, accounting for 26.4% of the country’s population and 40.3% of its GDP . It expects a 10 basis point cut in the one-year medium-term loan facility (MLF) rates, the one-year and five-year prime lending rates (LPR) and the seven-year reverse repo. short term days. . The next MLF is scheduled for Friday. China’s benchmark 1-year LPR has been unchanged since January at 3.70%, while its 5-year LPR remains stable at 4.60%.

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