China will cut interest rates further to stabilise economy, Yu Yongding says
- Former central bank adviser Yu Yongding believes China has policy tools to prevent severe capital outflows
- The yuan’s flexibility can also improve further to offset the impact on monetary policy independence from cross-border capital flows
China will further cut interest rates to stabilise the economy, as shrinking China-US yield spreads will not change Beijing’s monetary policy loosening bias, the China Securities Journal reported on Monday, citing former central bank adviser Yu Yongding.
Yu, a former member of PBOC’s monetary policy committee, told the newspaper that even as the US Federal Reserve raises its benchmark rate to 2 per cent, the real interest rates would remain negative due to high inflation, in contrast to positive rates in China.
In addition, China has policy tools to prevent severe capital outflows, while the yuan’s flexibility can improve further to offset the impact on monetary policy independence from cross-border capital flows, Yu was quoted by the article as saying.
On Friday, data showed new bank lending in China fell more than expected in February while broad credit growth slowed, raising pressure on the central bank to ease policy further to support the slowing economy.
A pullback in February’s lending had been widely expected as Chinese banks tend to front-load loans at the beginning of the year to get higher-quality customers and win market share.
Analysts polled by Reuters had predicted new yuan loans would fall to 1.49 trillion yuan in February, but the final tally was also lower than 1.36 trillion yuan in February 2021 when the economy was rebounding from a pandemic-induced slump.
“Broad credit growth was much weaker than expected last month, reversing much of the acceleration of the past few months,” Julian Evans-Pritchard at Capital Economics said.
“This suggests that more easing measures will be needed in meet the policy objectives that were recently laid out at the National People’s Congress.”
Household loans, mostly mortgages, suffered a rare contraction of 336.9 billion yuan in February, compared with 843 billion yuan in January, pointing to continued weakness in China’s property market, a major economic growth driver.
Ting Lu, chief China economist at Nomura, said a contraction in medium to long-term household loans was the first since the data was released in 2007, and in line with a 40 per cent drop in new home sales of top 100 developers in January-February.
Corporate loans fell to 1.24 trillion yuan from 3.36 trillion yuan.
Ming Ming, chief economist at Citic Securities, said February loans may reflect weakness in the property sector and household demand, but it could pick up as earlier easing measures begin to be felt.
“With the implementation of a slew of policies such as the promotion of favourable monetary and investment policies to stabilise the economy, March data would be better than that of February,” he said.
To spur growth, the central bank has cut interest rates and banks’ reserve requirement ratio (RRR), with more easing steps expected.
“We continue to expect a 50 basis point RRR cut and 10 basis point policy rate cut by the end of the second quarter this year, as the PBOC may need to do more to echo the State Council’s call for lowering effective lending rates,” analysts at Goldman Sachs said.
Chinese Premier Li Keqiang said on Friday he is confident of hitting this year’s economic growth target of “around 5.5 per cent” despite headwinds, pledging to provide more policy support during a politically sensitive year.
But many economists say that target is ambitious given challenges including the property downturn, growing coronavirus flare-ups and an uncertain global recovery.
China has said it will keep money supply and total social financing growth basically in line with nominal economic growth this year.
Broad M2 money supply grew by 9.2 per cent from a year earlier, central bank data showed, below estimates of 9.5 per cent forecast in the Reuters poll. It rose by 9.8 per cent in January.
Outstanding yuan loan grew by 11.4 per cent from a year earlier compared with 11.5 per cent growth in January. Analysts had expected 11.5 per cent growth.
Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 10.2 per cent in February from a year earlier and from 10.5 per cent in January.
TSF includes off-balance sheet forms of financing that exist outside conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.
In February, TSF dipped to 1.19 trillion yuan from 6.17 trillion yuan in January. Analysts polled by Reuters had expected February TSF of 2.22 trillion yuan.