China preps another stimulus volley but holding back the big guns

Standard Chartered economists estimate the expected RRR cuts would release at least 300 billion yuan into the banking system.
Standard Chartered economists estimate the expected RRR cuts would release at least 300 billion yuan into the banking system.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - China is preparing to inject more cash into the financial system, as the slowing economy faces further pressure in the form of slumping global demand from the coronavirus pandemic.

While the central bank is expected to encourage bank lending by lowering the reserve requirements in the coming days, a blitz of data on Monday (March 16) is expected to lay bare the scale of stimulus needed to reboot the US$14 trillion (S$19.8 trillion) economy.

Retail sales, investment and industrial output are all expected to show unprecedented declines in the two-month period of January and February, reflecting the shutdowns to curb the coronavirus that could result in the first quarterly contraction in decades. With the economic outlook growing darker by the day in the US and Europe and governments pumping in US$130 billion and counting in stimulus, China's softly-softly approach is beginning to look behind the curve.

"It is pretty clear now that only with a relatively massive stimulus plan could China achieve its previous growth targets to double the size of the economy from 2010," said Nie Wen, an economist at Huabao Trust Co in Shanghai. "We don't need to just patch the holes, we need something that adds real impetus to the economy."

A dramatic escalation of stimulus would mean however that the government and People's Bank of China would need to soften their approach to reining in debt, a focus that has forced the government to lean on measures like tax cuts and support for small and medium-sized business instead of large-scale fiscal spending.

Their caution is driven by fears of another debt blowout after total borrowing ballooned in the decade after the global financial crisis in large part due to the 4 trillion yuan (S$805 billion) stimulus and wave of bank lending unleashed at the time.

Exactly how much extra borrowing and spending is needed this time will depend on whether or not the government wants to preserve a growth target of "about 6 per cent" it was originally expected to set this year.

A level close to 6 per cent would be necessary for the Communist Party to claim it has met its pledge to double 2010 gross domestic product by this year, helping to create what it calls a "moderately prosperous society."

Economists continue to downgrade their growth outlook. The median forecast for year-on-year growth in the first quarter is 4.0 per cent, the weakest in 30 years, and that for 2020 is 5.5 per cent, according to a survey in February.

Data for the first two months of the year are merged due to the annual Spring Festival and are scheduled to be released on Monday.

Formal targets for 2020 haven't been released yet though, as planning for the year has been complicated by the postponement of the annual National People's Congress, or rubber stamp parliament, which normally would have met by now to agree economic priorities.

 
 
 

A key metric is the official budget deficit target. Before the virus hit, that had been expected to be set slightly higher for 2020 at about 3 per cent of GDP. The government has avoided crossing the 3 per cent line in recent years, though that may be inevitable now.

There are other complications too. Sky-high food inflation puts a limit on monetary easing and the scrapping of the PBOC's benchmark lending rate has removed a powerful tool at a critical time for the economy.

Standard Chartered economists estimate the expected RRR cuts would release at least 300 billion yuan into the banking system.

The impact of reserve-ratio cuts is indirect at best. It frees up a cheap source of funding to banks, lowering their cost of their liabilities. That may encourage lending to the real economy, especially if linked to loans to small businesses. But it's not a broad reduction in the cost of borrowing.

Lu Ting, chief China economist at Nomura International HK, expects the PBOC to cut its benchmark deposit rate and medium-term lending rate each by 25 basis points in coming months, though doesn't see much room for a fiscal blow out.

Expectations for aggressive fiscal stimulus including large infrastructure investment are growing, although how much can actually be done is limited by the fact that there's no signs of relaxing the tight oversight of local governments' off-balance-sheet borrowing.

Even if local governments are willing to spend more, they need find the funding after aggressive tax cuts saw their revenue growth barely budge in 2019. And the property market, which used to be the key pillar of economic growth, is still under strict supervision after fears of a price bubble.

"We do not think Beijing has the capacity to launch a massive stimulus package this time around due mainly to much more limited policy space than in previous easing cycles," Nomura's Lu said.