Watch for another PBOC credit jolt to prop up China’s economy as growth momentum fades
- Pressure remains for the People’s Bank of China to lower the required ratio of cash that banks must hold in reserve against deposits, a move that would inject new credit into the economy for the fifth time in 13 months
- US-China trade truce is improving sentiment
A sharp drop in government bond yields last month was fuelled by expectations that Beijing will take greater monetary policy easing steps, with the central bank likely to once again cut the amount of cash commercial banks have to hold in reserve.
The two-year government bond yield declined 34 basis points to 2.71 per cent in November, posting its biggest monthly drop since May 2015. The 10-year yield slumped 16 basis points to 3.37 per cent, also marking its worst fall since 2015. The performance of the bond market is generally viewed as an indicator of investor expectations for future interest rates and economic conditions.
While sentiment may temporarily improve thanks to the tariff ceasefire agreed to by US President Donald Trump and Chinese President Xi Jinping on Saturday, analysts still doubt it will prevent China’s economy from slowing in the coming quarters.
The White House has agreed to a 90-day trade truce, implied to get underway with immediate effect, with the US postponing the planned escalation of tariffs on US$200 billion of imports from China from 10 per cent to 25 per cent. China also agreed to a “very significant” increase in US products to help reduce the large bilateral trade imbalance.
“However, is it realistic to assume China will accept structural reforms of its economy, and within 90 days?” said Michael Every, Asia-Pacific senior strategist at Rabobank. “Whispers are already flying of another massive state stimulus package ahead.”
“If negotiations fail by the early March 2019 deadline, the tariffs on US$200 billion will rise to 25 per cent alongside the threat for US tariffs on the remaining US$265 billion worth of Chinese goods,”
Goldman Sachs analysts said.
Even if trade negotiations end in a lasting deal, Chinese exports still look set to slow as global growth cools, the analysts said. Slower credit growth and a cooling property market are also likely to intensify in the coming months.
The G20 summit took place as the Chinese economy shows signs of slowing under the weight of US tariffs. The latest official purchasing managers’ index (PMI) data for November shows that manufacturing is no longer expanding on an overall basis, with new orders slowing.
The People’s Bank of China has lowered commercial lenders’ reserve requirement ratio – the amount of money that banks are required to hold at the central bank – four times already this year, with the cut announced in October pumping US$110 billion into the banking system.
It has also created new lending tools to help relatively stronger private companies weather liquidity problems. In addition, Beijing has adopted a more proactive fiscal policy, encouraging provincial governments and state-owned enterprises to speed up spending and investment.
But policy easing so far has not had much impact on the real economy, according to DBS Bank strategist Nathan Chow. He says banks are reluctant to lend to private companies that are perceived to be risky, and investment growth continues to slow, despite the central bank’s efforts to inject more credit into the economy.
Eva Yi, an analyst at CICC, said that the falling rate of return on investments was fuelling capital outflows, at least partially offsetting the PBOC’s attempts to boost capital for lending. She believes the outflow pressure is likely to continue for some time, complicating easing efforts by the PBOC.
The PBOC spent 91.58 billion yuan (US$13.19 billion) selling foreign exchange to banks for their customers in October, after outlays of 119.39 billion yuan in September, according to official data released last week, indicating a second straight month of capital outflows.
The sales imply that the PBOC stepped into the foreign exchange market to stop or slow yuan depreciation by selling dollars.
The PBOC is extending initial funds to provide credit risk hedging instruments for private companies. However, the effect of this will take time to appear in the numbers, with economic growth likely to continue to slow through the second and third quarter of 2019, said Hayden Briscoe, Asia-Pacific head of fixed income at UBS Asset Management.
“Economic data still looks poor. Regardless of the trade talks, another RRR cut could be announced in December with implementation made in the new year,” Briscoe said last week.
Morgan Stanley forecasts that China’s GDP growth could decelerate to 6.3 per cent in 2019 from 6.6 per cent in 2018.