MNI: Tariffs, Weak Demand To Drive Moderate PBOC Easing In H2

The People’s Bank of China would be likely to respond to any economic pressure from U.S. tariffs and domestic demand with a cut to its policy rate and reserve requirements towards the end of the year, though officials remain wary of slipping into a Japan-style liquidity trap and will want to avoid excessive further monetary easing, policy advisors and economists told MNI.

The PBOC could make another 10-basis-point cut to the benchmark 7-day reverse repo rate and a 50bp reduction in banks’ reserve requirement ratio in the rest of the year, considering the highly uncertain results of China-U.S trade talks and continues weak domestic demand, said Lian Ping, chairman at the China Chief Economist Forum, noting that GDP growth is expected to drop to 4.8-5% y/y in Q2 from 5.4% in Q1. While already-announced stimulus should boost activity in the second half, more policy support will be required to meet the growth target of around 5% this year, Lian said. (See MNI: China Sees 10% Tariffs As Realistic, May Offer UST Deal)

But officials will be cautious in providing additional monetary easing, he added, given that the PBOC began its easing cycle in 2018 during the first China-U.S. trade war and that the 7-day reverse repo rate is already at an historic 1.4% low. Cutting rates too quickly risks falling into the zero-bound trap that ensnared Japan, he warned.  

TARGETED TOOLS

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University of China, agreed, saying weak domestic demand will constrain any further easing. Money supply data reveals little improvement in demand for loans from consumers or business, as reflected by weak consumption and investment, despite sufficient supply of credit and liquidity, he said.

The PBOC is likely to opt to use targeted and structural tools, rather than deploy broad-based easing, Zhao continued, adding that a clearer policy picture could emerge at July’s Politburo meeting after the 90-day suspension of U.S. tariffs ends on July 9. 

Policymakers will aim to counterbalance external uncertainties and to maintain relatively stable growth in investment and consumption, Zhao noted. Targeted measures would also aim to prevent excessive volatility in equity and foreign exchange markets, he said. While trade setbacks could weaken the yuan, the 7.30 level may still offer support, Zhao argued, adding that broader doubts about the dollar could drive a modest appreciation of China’s currency.

A breach of 7.0 to the dollar later this year cannot be ruled out, said Lian, though a sharp yuan strengthening would run counter to official policy. Recent steps to ease outbound investment limits, especially for mutual funds, suggest authorities are aiming to ease appreciation pressure, he added.

FISCAL STIMULUS

An escalation of the China-U.S. dispute, combined with hits to consumption, property sales and investment, could lower this year’s GDP growth at 4.4% in a downside scenario, according to Yuan Haixia, director of China Chengxin International Credit Rating’s research institute, though incremental stimulus still means that 5% is the baseline.

There is still scope to cut the seven-day repo rate and reserve requirements in Q4 to support foreign trade, tech innovation, real estate, employment and other key sectors, Yuan said, noting low inflation has kept real interest rates relatively high. (See MNI INTERVIEW: China Has Room For Further Monetary Easing) 

She suggested authorities prepare contingency measures in response to changing domestic and global conditions, including allocating an extra CNY1 trillion in fiscal support, noting China’s GDP deflator has been negative for eight straight quarters, with nominal GDP growth trailing real GDP.