Earlier this week, China’s top leadership surprised the market by signaling a shift in monetary policy stance after 14 years, which is unequivocal evidence that the economic problems faced by this Asian country are significant and require certain actions to ensure that the current situation does not gradually transform into a catastrophic crisis.
At the same time, the media, citing experts, note that outsized stimulus measures from Beijing are unlikely.
It is worth noting that the traditional communication practice of the Chinese authorities with the public does not provide detailed comments and extensive statements about the state of affairs in the space of the local economic system, which is the second largest in the world. At the same time, the officially signaled shift in monetary policy stance, as a reflection of how Beijing assesses the economic situation, clearly surpasses any comments and statements.
China intends to switch its policy stance next year to moderately loose from prudent. The Chinese authorities have not used the appropriate wording since the global financial crisis of 2008. At that time, Beijing loosened its stance and stuck with it until 2010.
There is also the first case when the current leadership of China recognized that monetary policy should be loose to set the stage for a new cycle of easing this policy. The corresponding statement was made by Larry Hu, chief economist at Macquarie. The expert also noted that the mentioned tone of Chinese leadership indicates that policymakers are deeply concerned about the economic outlook, given sluggish domestic demand and the threat of another trade war.
In September, Beijing began to actively impose measures to stimulate the economy. So far, the relevant actions have not generated a positive result. Recent indicators indicate that the world’s second-largest economic system continues to struggle with deflationary pressures amid tepid consumer demand and a prolonged downturn in the real estate market.
Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank, said the scope for potential monetary easing is much more limited now than it was 15 years ago. The expert also expects that the People’s Bank of China will cut interest rates by more than 50 basis points over the next two years.
Gabriel Wildau, managing director of Teneo, said the Asian government had unleashed historically large-scale stimulus measures in response to the global financial crisis. In November 2008, Beijing announced a 4 trillion yuan ($586 billion) economic aid package. The corresponding amount at that time was about 13% of China’s gross domestic product (GDP). These funds were intended to sustain economic growth and wean off the effects of the worst global downturn in 70 years.
In 2008, the Chinese authorities adopted a moderately loose policy stance. At that time, the central bank of the Asian country cut its benchmark 1-year lending rate by a total of 156 basis points and the cash reserves ratio by 1.5 percentage points.
Last month, China unveiled a five-year stimulus package totaling 10 trillion yuan to handle local government debt problems. Beijing also pledged more economic support next year. The amount of the stimulus package announced last month is about 2.5% of China’s annual GDP.
Economists at Morgan Stanley said the Asian country needs to significantly expand its debt swap program to offset the local government financial vehicle debt, which accounts for almost half of China’s GDP. Also, these experts expect that the fiscal deficit of the central government of the Asian country will increase by 1.4% next year. The corresponding forecast is based on the fact that the Chinese authorities will borrow more to shore up the economy. The target budget deficit of the central government of the Asian country for 2024 is 3%.
The People’s Bank of China has been cutting key interest rates since the end of September. The Asian country’s financial regulator has taken appropriate action after the Federal Reserve began to ease its monetary policy. Cutting interest rates in the United States has allowed China to lower its domestic borrowing costs without provoking a sharp depreciation of the yuan. However, the central bank of the Asian country has refused to aggressively cut interest rates, fearing a potential capital flight if the gap between Chinese corresponding indicators and those of other countries increases.
Nowadays, in China, the one-year loan prime rate, the benchmark for most corporate and household loans, is 3.1%. The five-year rate, a reference for property mortgages, is 3.6%.
Ju Wang, head of Greater China FX & rates strategy at BNP Paribas said in a note that the tone of recent statements by the authorities reinforced market expectations that the Asian country’s financial regulator will probably cut key interest rates by 40-50 basis points to close to 1% by the end of 2025.
Bets on further lowering of borrowing costs have caused a prolonged rally in Chinese government bonds.
Bruce Pang, chief economist of Greater China at JLL, said that easing monetary policy may become a factor putting depreciating pressure on the yuan and noted that securing the momentum of economic growth will be of higher priority than stabilizing the exchange rate. The expert expects the central bank of the Asian country to cut the reserve requirement ratio.
Ju Wang stated that reviving household consumption is a top priority for Chinese policymakers. The expert predicts that the government of the Asian country will more than double its trade-in program to over 300 billion yuan to stimulate domestic spending.
It is worth mentioning that in July Beijing had announced the allocation of 300 billion yuan in ultra-long special government bonds to support the trade-in and equipment upgrade policy.
As we have reported earlier, China Prepares for New Trade Tensions With US.
