PBOC, under pressure to take easing steps, is hemmed in by inflation

BEIJING • China's central bank is set to take more easing steps, pressured by a shaky economy that is undercutting jobs.

But it faces limited room to manoeuvre due to worries over rising inflation and capital flight, policy insiders and analysts said.

Analysts now expect cuts in the country's benchmark lending rates as early as next Monday, after the People's Bank of China (PBOC) unexpectedly lowered two key rates this week, as data showed that the economy unexpectedly slowed in July.

But the PBOC is walking a tightrope - seeking to support the Covid-19-ravaged economy while avoiding massive stimulus that could add to inflationary pressures and risk outflows from China's struggling stock and bond markets, as the US Federal Reserve and other economies aggressively raise interest rates.

China's economy narrowly avoided contracting in the second quarter amid widespread lockdowns and a deepening property crisis.

Covid-19 cases have also rebounded again in recent weeks. Nomura estimates that 22 cities are currently in full or partial lockdowns, making up 8.8 per cent of gross domestic product.

"Currently, the main problem that China faces is slowing economic growth; safeguarding growth is the top priority," Mr Yu Yongding, an influential government economist who previously advised the PBOC, told Reuters.

"What we should do is to continue to adopt expansionary fiscal and monetary policy, including cutting interest rates," he said.

China's central bank is likely to cut its benchmark lending rate for companies and home buyers, known as the loan prime rate, at its next setting on Aug 22, policy insiders and analysts said.

Shortly before weak data was released on Monday, the PBOC unexpectedly cut the rate on its medium-term lending facility for the second time this year, by 10 basis points.

It also cut its reverse repo rate by the same margin. Both were already at record lows.

"The rate cut is not enough - we should step up easing," said a government adviser who spoke on condition of anonymity.

However, the central bank is unlikely to cut banks' reserve requirement ratio (RRR), a traditional tool to boost liquidity, any time soon, given that the financial system is already awash with cash, China watchers said.

The central bank already has slashed the average RRR level to 8.1 per cent from 14.9 per cent in early 2018, pumping a staggering nine trillion yuan (S$1.83 trillion) into the economy.

The PBOC may instead use structural policy tools, such as low-cost loans, to give targeted support to ailing small firms and sectors favoured by state policies, the experts said.

On Tuesday, Premier Li Keqiang said that Beijing will step up policy support for the economy and take more steps to spur consumption and investment.

Even then, some analysts said modest rate cuts may help only at the margin if companies and consumers remain wary of taking on more debt. New bank lending in China last month fell more than expected and was less than a quarter of the level in June.

With no sign that the government is easing its tough zero-Covid-19 policy, some private economists expect the economy to grow by about 3 per cent this year.

This would be the slowest since 1976, excluding the 2.2 per cent expansion in 2020, during the initial Covid-19 outbreak.

As for inflation, most economists do not believe it is creating a big headache for policymakers for now, given weak demand.

REUTERS