PBOC central financial institution alerts RRR minimize in shocking financial coverage motion

Street vendors in Chengdu City, like this one pictured on June 18, 2020, were mentioned by Chinese Premier Li Keqiang as an example of economic recovery during COVID-19.

Yuyang Liu | Getty Images News | Getty Images

BEIJING – China’s top executive surprised investors late Wednesday by saying the central bank would stimulate the economy by cutting the amount of banks’ reserves.

“We believe this political signal suggests that the economy likely slowed in June,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a statement. He said policymakers likely already know what June retail sales and other macro data looks like.

The economic data for the last month and the gross domestic product for the second quarter will be released on Thursday next week.

Investors may already have some clues. On Monday, the Chinese Association of Automobile Manufacturers said car sales in China were likely down 14.9% year over year in June. Cars are an important part of retail sales.

The People’s Bank of China last cut the minimum reserve ratio (RRR) in April 2020 as the country left the culmination of its battle to curb the spread of Covid-19 domestically.

China managed to quickly control the outbreak domestically and was the only major economy to grow last year. But the continued spread of the disease abroad and a surge in raw material prices have heightened domestic uncertainties.

In the past two months, consumer spending – which China relies more on for growth – has grown more slowly than expected, and authorities have continued efforts to support smaller private businesses that create a significant portion of the jobs.

Wednesday’s State Council meeting, chaired by Premier Li Keqiang, maintained this tone of support.

“Given the impact of higher commodity prices on the production and operation of businesses, the meeting decided to maintain monetary stability and improve its effectiveness without resorting to massive incentives,” said a press release from the meeting.

Read more about China from CNBC Pro

“Reductions in the required reserve ratio and other policy instruments will be introduced as needed to increase financial support to the real economy, particularly micro, small and medium-sized enterprises, and to encourage steady reductions in overall financing costs,” the communication reads.

Authorities also decided to lift household registration restrictions so that those working in gig economy positions outside of their hometowns can have access to local pension and health insurance plans. The guides said they would test occupational accident insurance, particularly for ridesharing, food deliveries and express delivery drivers.

RRR cut not a matter of course

After the meeting, Nomura’s chief economist for China, Ting Lu, and his team said in a statement that they now expect the central bank to cut the reserve requirement ratio across the board by 50 basis points “in the coming weeks.”

They also expect the government to accelerate its bond issuance after using just 2.5 trillion yuan ($ 385.72 billion) out of a total allotment of 7 trillion yuan in the first half.

Lu pointed out, however, that a cut should not be taken for granted – noting that the State Council’s mention of a possible RRR cut in June 2020 did not lead to one. However, six other mentions since mid-2018 have been followed by an RRR cut, he said in the note.

Lu expects that “downward pressure on growth will increase” in the second half of the year, particularly the fourth quarter. Nomura is forecasting GDP growth of 8.1% year over year in the second quarter, 6.4% in the third and 5.3% in the fourth quarter, which corresponds to an annual growth rate of 8.9%.

China’s signal for a looser monetary policy comes as the US Federal Reserve considers plans to tighten policy and gradually move away from stimulus measures in the wake of the coronavirus pandemic.

Comments are closed.