As we had forecast in our China outlook 2022 in early November, and in line with Premier Li Keqiang’s Dec. 3 request, the People’s Bank of China (PBOC) announced on Dec. 6 to lower overall Required Reserve Ratio (RRR) by 50 basis points, effective Dec. 15.
According to the PBOC, this cut will release 1.2 trillion yuan ($188 billion) in base money liquidity and partly replace the maturing medium-term lending facility (MLF) loans (950 billion yuan will mature in December). The PBOC also expects the RRR cut to reduce banks’ funding costs by 15 billion yuan per year, which will help lower financing costs of the real economy, especially for SMEs. After the latest RRR cut becomes effective, the standard RRR for large Chinese banks will be 11.5%, while that for medium-sized and small banks will be 8.5% and 5%, respectively.
A clear monetary easing signal, amid growth headwinds
Although the PBOC reiterated an unchanged “prudent” monetary policy stance, we think this RRR cut in fact sends a clear signal of monetary policy easing and reflects the government’s intention to stabilize market expectations and growth.
China faces significant downward pressure on growth from a deepening property downturn and subdued household consumption. Evergrande’s warning of default last Friday may lead to additional negative spillover effects for the property sector and the economy. Modest macro policy easing, including this RRR cut, could help ensure an ample liquidity environment, lower market rates and actual funding cost, and anchor market expectations about government policy direction.
We continue to expect the PBOC to maintain an accommodative monetary policy, which could mean additional RRR cuts and easier credit policy. We expect credit growth to have bottomed in October and see a modest rebound in the coming months.
Politburo meeting sets the policy tone: stabilizing growth
On Monday, the Politburo held its preparation meeting for the upcoming Central Economic Work Conference (CEWC). Compared with meetings earlier this year, the meeting put overall economic stabilization as the top priority. To achieve such an objective, the Politburo meeting called for expanding domestic demand, which includes facilitating consumption recovery and “proactively expanding effective investment.” The Politburo also called for pushing forward with social housing construction, supporting commodity housing market to better satisfy homebuyers’ reasonable housing demand, and facilitating the healthy development and “a virtuous circle” of the property sector.
More than the RRR cut, we think the Politburo policy tone adjustment signaled clearly that the senior leadership has recognized downward pressures on the economy, including from the property downturn, and has begun to adjust policies pragmatically to limit the downside.
In addition, when outlining structural policies, the meeting emphasized stimulating the market players’ vitality, strengthening intellectual property rights protection, acknowledging the principle role of enterprises in innovation, deepening reforms and opening, and enhancing social protection. These guidelines may indirectly address some concerns and questions that have arisen in recent months.
What to expect for the upcoming Central Economic Work Conference?
As signaled by the Politburo meeting, we think the upcoming CEWC will likely emphasize downside risk to the economy and call for policies to stabilize growth and the property sector.
As in previous years, key policy targets will be released at the National People’s Congress next March, not at the CEWC. We expect the CEWC to 1) maintain a “proactive” fiscal policy stance with a clear push for faster public spending, front-loading and more efficient use of special local government bonds, and more tax and fee cuts; 2) keep a “prudent” monetary policy again with a modest easing bias, calling for ample liquidity, lower funding cost, and possibly stable credit growth; 3) reiterate the Politburo call on property policy, with marginal easing on financing support for both home buyers and developers, and a greater push on rental construction; and 4) emphasize the green economy and decarbonization as a long-term theme while adopting pragmatic policies in the short term, supporting tech innovation and implement regulations pragmatically.
More modest property easing to come
As outlined in our property and policy note, following the Politburo meeting’s affirmation of stabilizing the property sector, we expect China to ease policies modestly in the coming months to mitigate the property downturn and avoid a hard landing.
We expect the government to keep its overall “no speculation” policy stance unchanged and not adopt any major stimulus. Within this framework, we expect developer financing and cash flows to improve with the government relaxing some restrictions on mortgages, developer access to bank credit and onshore bond market, and pre-sales funding control. Some local governments may ease purchase and price restrictions and increase rental housing construction. In addition, we expect infrastructure investment to be boosted and credit restrictions could be relaxed somewhat as well.
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.
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