China's latest move to cushion its economy won't be the last, say economists

The People's Bank of China on Jan 4, 2019, announced another cut to the amount of cash lenders must hold as reserves in a move to release a net 800 billion yuan (S$158.4 billion) of liquidity.
The People's Bank of China on Jan 4, 2019, announced another cut to the amount of cash lenders must hold as reserves in a move to release a net 800 billion yuan (S$158.4 billion) of liquidity.PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - China's latest move to cushion its slowdown won't be the last.

That's the view of economists after the central bank on Friday (Jan 4) announced another cut to the amount of cash lenders must hold as reserves in a move to release a net 800 billion yuan (S$158.4 billion) of liquidity and offset a funding squeeze ahead of the Chinese New Year.

After the 100 basis point cut announced last week, Nomura Holdings expects the People's Bank of China to cut the reserve requirement ratio by a further 150 basis points this year and add more liquidity injections through the medium-term lending facility or targeted MLFs. China International Capital Corp. expects another 100 to 200 basis points of RRR cuts and lower open market operation rates.

Headwinds are rising as restrictive real-estate measures temper credit flows, consumers tighten their wallets and external demand is clouded by uncertainty as authorities negotiate with their US counterparts to avert a deepening of the trade war. That means few see the economy finding a bottom in the near term, even with the latest stimulus.

"The transmission of monetary policy loosening will likely remain impaired without prompt adjustments to policies that are choking property demand, local government financing, and the credit cycle expansion," CICC economists Eva Yi and Liang Hong wrote in a note.

Data last week showed manufacturing gauges falling into contraction, further depressing investor sentiment after a rough 2018. The Shanghai Composite Index hit a four-year low and Apple shares plunged the most since 2013 after reporting it would miss a quarterly sales forecast because of slowing iPhone sales, especially in China.

The RRR cut releases more permanent liquidity compared to other methods of injecting funds, making it easier for banks to allocate the money to longer-term assets such as lending and corporate or government bonds and can help reduce banks' costs, said Wang Tao, head of China economic research at UBS Group in Hong Kong.

 

Tao expects additional policy easing as growth slows, including tax cuts and increased fiscal spending. Unless the property market slows sharply or the trade war escalates, there won't be a significant and nationwide property policy easing anytime soon, she said, forecasting 2019 GDP growth of 6.1 per cent.

NOT ENOUGH

Nomura's Lu Ting says just turning on the money spigot won't be enough.

"What Beijing really needs to do now is to find someone who is willing to borrow and spend the money, and is able to spend them effectively on meaningful projects," Mr Lu wrote. "Market investors are still not well prepared for the ongoing worsening slowdown."

Beijing will become increasingly aggressive in rolling out stimulus measures, but moves such as deregulating the property market in Tier-1 and 2 cities will only be introduced in the second quarter or later, according to Lu.

"This bias to support the economy just enough to prevent a hard lending - but tolerate a modest slowdown - is likely to be maintained in the near future," Goldman Sachs Group economists wrote in a note.