China set to ease credit, but economic woes may be too deep for quick recovery

China’s explicit call to reduce the amount of bank cash reserves and increase lending has bolstered expectations of an imminent policy easing, but economists say any credit easing may not be enough to push back the prospect of a deep economic downtrend.

Growth in the world’s second-largest economy has slowed since the start of 2021 as traditional drivers of the economy such as housing and consumption have weakened. Exports, the last major driver of growth, are also showing signs of fatigue.

More recently, widespread disruptions to activity from China’s biggest COVID-19 outbreak since 2020 and severe lockdowns have tipped the balance towards recession, some economists said.

On Wednesday, the Council of State, or cabinet, said after a meeting that monetary policy tools — including cuts in banks’ required reserve ratios (RRRs) — should be used in a timely manner.

In the last two rounds of RRR cuts in 2021, the respective announcements of the easing were made two to three days after being signaled by the Council of State.

“We expect the PBOC to offer a 50 basis point RRR cut and potentially also an interest rate cut in the coming days,” Goldman Sachs wrote in a note Thursday.
Most private forecasters now expect an RRR cut of 50 basis points (bps), which would free up more than 1 trillion yuan ($157 billion) of long-term funds that banks can use to boost lending.
A commentary from the state-run Securities Times said April 15 would be the window to watch.
China will release March industrial production and retail sales data on Monday, which are expected to reflect the impact of COVID restrictions, as well as 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 struggle while consumers remain cautious in a highly uncertain economy. .

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 property curbs, the most concerning issues are mostly on the supply side, and simply adding loanable funds and cutting lending rates slightly won’t be enough. probably not to 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 drop 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. .

But no change in the one-year MLF rate is expected when the central bank prepares to roll over 150 billion yuan of those medium-term loans on Friday, 31 out of 45 traders and analysts said in a Reuters poll.

Since a wave of policy rate cuts in January, China has kept its benchmark one-year LPR CNYLPR1Y=CFXS unchanged at 3.70% and its five-year LPR CNYLPR5Y=CFXS stable at 4.60%.

“Monetary policy is not a panacea for all problems,” the Securities Times commentary said.

“Unlocking supply chains and industrial chains, allowing companies to get orders and allowing people to have income would be the only way to improve cash flow in the real economy and achieve a turnaround. naturally.”
Source: Reuters (Reporting by Ryan Woo; Editing by Kim Coghill)

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