China’s surging pork prices leave limited leeway for interest rate cut to support growth

Fears of exasperating already rapidly rising consumer prices are limiting the options for Chinese policymakers to make aggressive rate cuts and implement other monetary policy easing even as the economy continues to worsen, analysts said.

Surging pork prices pushed China’s consumer price index (CPI) to a nearly eight year high in October, while the headwinds for China’s economic growth are continuing to build as seen in weakening in the export, industrial and property sectors.

Policy easing space is also limited by other factors, analysts said, as lowering interest rates sharply could have the unwanted effects of fuelling capital outflows and deterring foreign investment, while also undermining the government’s campaign to cut back on risky lending within the financial sector.

On Monday, government data showed that Chinese banks extended 661.3 billion yuan (US$94.5 billion) in net new loans in October, the lowest monthly total this year and well below expectations of 800 billion yuan. Total aggregate financing stood at 618.9 billion yuan, below forecasts of 950 billion yuan.

Overall, China’s absolute total debt level continues to rise, reaching 303 per cent of gross domestic product (GDP) at the end of the first quarter, according to data from the Institute of International Finance.

Trivium China, a Beijing-based China policy analysis firm, said comments by Zhou Liang, vice-chairman of the China Banking and Insurance Regulatory Commission on Sunday, clearly indicated that de-risking efforts would continue, whether financial institutions “like it or not.”

More pain may be also on the cards for China’s economy as the central bank takes small, incremental policy easing steps. Last week, the People’s Bank of China (PBOC) cut the one-year rate on its medium-term lending facility (MLF) – which is uses to add low-cost liquidity to the banking system – by only 5 basis points to 3.25 per cent, which is unlikely to have a significant effect on the economy.

Both new loan growth and aggregate financing in October fell short of expectations, mainly as a result of a slowdown in lending to households, which is being curtailed by tighter restrictions on mortgages and consumer credit, said Julian Evans-Pritchard, senior China Economist at Capital Economics.

Other financing activities also slowed further, with the shadow banking sector shrinking by 234.4 billion yuan.

The stock of government bonds, which is a gauge of the pipeline of infrastructure investment, dropped by 20 billion yuan in October due to fiscal constraints as local governments exhausted their annual issuance quotas last month, Evans-Pritchard added.

Ken Cheung Kin-tai, chief Asian currency strategist at Mizuho Bank, said that the fact that new short-term household loans fell to only 62.3 billion yuan in October from 265.7 billion yuan in September, while long-term household loans dropped to 358.7 billion yuan from 490.9 billion yuan, suggested softening consumer and mortgage demand.

If key economic data worsens further, Trivium said a window of opportunity for policymakers to signal a shift to more aggressive economic stimulus would be at Central Economic Work Conference in early December, when top Chinese government officials meet to set the economic policy course for 2020.

But other economists continue to expect the PBOC to maintain its current monetary policy stance, with only a slight easing bias, probably until at least the headline CPI passes its peak early next year.

Raymond Yeung, Greater China chief economist at ANZ Bank, predicts that the PBOC will continue its measured pace of easing banks’ funding costs, cutting the interest rates in its seven-day reverse repo rate and its loan prime rate by 5 basis points this year.

Lu Ting, chief China economist at Nomura International, expects the PBOC to wait until early next year before deciding to cut its MLF rate and reserve requirement ratio (RRR) – the amount of money that banks are required to hold at the central bank – any further.

“Although the RRR and MLF rate cuts may help stabilise market sentiment and bolster growth, we expect the next RRR and MLF rate cuts to come in or after spring 2020, when CPI inflation likely passes its peak,” Lu said