Kevin Yao

BEIJING (Reuters). China’s central bank will unveil further easing steps in support of slowing growth. But it will prefer injecting more money into the economy rather than cutting rates too aggressively.

Analysts believe that modest rate reductions could be possible if the business environment cools, but expectations that the U.S. Federal Reserve would tighten monetary policy quickly will increase concerns about capital outflows to China.

Chinese leaders are promising more support as the property market slump weighs down investment, strict COVID-19 curbs to consumption and tighter COVID-19 restrictions on consumption pose a challenge.

Each city in the country is imposing stricter viruses curbs. Tianjin, the northern metropolis, tested its 14,000,000 inhabitants. Some economists have reduced their 2022 growth forecasts.

We need to have a fairly loose monetary policy. “How much we loosen will depend on the economic environment, but our policy direction is clear,” Yu Yongding told Reuters. Yu Yongding was an influential economist and previously advised the People’s Bank of China.

According to economists and insiders, it is possible that the PBOC will reduce banks’ reserves requirement ratios (RRRs) in the next months. Small businesses will also receive more support.

On Dec. 15, the PBOC cut the RRR (the amount of cash banks have to hold in reserves) by a minimum 50 basis points. This was its second such action last year. On Dec. 20, the one-year prime rate (LPR) for benchmark loans was cut 5 bps.

Lian Ping is the chief economist of Zhixin Investment. Xu Hongcai (deputy director of China Association of Policy Science’s economic policy commission) expects to see sharper RRR reductions.

An insider who spoke anonymously said, “We absolutely need to loosen our policy as the down pressure on economy is relatively large.”

Tao Wang at UBS was the chief China economist. She told reporters that Tuesday’s RRR cuts would be in March and April. However, the PBOC should keep the LPR stable.

Economists stated that there is little room for reducing the LPR, as real interest rates have already been low in relation to current price increases.

Dec factory-gate inflation dropped to 10.3% in December, following measures taken by the government to reduce high raw material costs. However, consumer inflation has slowed down to 1.5% according to official data released Wednesday.

The benchmark 1-year lending rate is 3.8%

While the PBOC said that they will follow China’s economic direction, economists expect Fed rate hikes to reduce the spread between China and the USA, causing capital outflows and weighing down the yuan.

Four U.S. Interest Increases are expected by Wall Street’s largest banks this year. They will begin in March. This is a much more aggressive call than the one made a week ago.

Economists believe that China’s strong trade surplus and capital controls can protect the economy against capital flight, which could be a problem for other emerging economies like Turkey.

Yu, a former PBOC advisor, stated that although it could put some restrictions on our monetary policies, “we can still maintain our policy independence.”

He said, “In other words: If we want to reduce interest rates, or loosen our policy, it’s possible,”

According to BofA Global Research, China’s fourth quarter growth was likely to slow to 3.1% from 4.9%. These data will be published on January 17.

Goldman Sachs’ (NYSE:) 2022 China growth prediction has been reduced to 4.3% due to COVID-19 updates. In the first quarter it expects a 50-bps reduction in RRR and in the first half a 10-bp decrease in one year LPR.

« A POLITICAL ISUME »

China’s policymakers focused last year on reducing debt and property risks, which only exacerbated the slowdown. They have tried to prevent a worsening slowdown, which could lead to job loss ahead of the key Communist Party Congress later this year.

A Reuters poll revealed that new bank loans will likely surpass record levels in 2021, for the second consecutive year.

Han Wenxiu said that all regions and department should take responsibility for stabilizing the economic situation. He was deputy director of the Office of the Central Commission for Financial and Economic Affairs.

Han stated in the state-run Outlook Weekly that all parties must actively promote policies for economic stability, and should be careful to introduce policies with contractionary consequences.

China’s top leaders want to see an increase in economic growth of at most 5% by 2022, according to sources.

China may increase its fiscal expenditures this year to boost infrastructure investment. It will have a lower annual budget deficit ratio as well as a special local bond quota, which is largely comparable to 2021.

Analysts Morgan Stanley Also, expect another round tax cut for business (NYSE:).

China has set an annual budget deficit of 3.2% GDP in 2021 and special bond quotas of 3.65 trillion Yuan ($573.44billion).

Although policymakers will likely ease certain property curbs in order to avoid a hard landing and to keep the economy afloat, any major change to their policies is unlikely, as they are still concerned about property bubbles.

($1 = 6.3651 renminbi)