China could opt for modest monetary easing ahead of Fed rate hikes

By Kevin Yao

BEIJING, Jan 12 (Reuters) – China’s central bank is poised to unveil further easing measures to cushion the slowdown in growth, though it may prefer to inject more cash into the economy rather than cut interest rates. aggressively, experts and economists said.

While some analysts believe that modest rate cuts could still be applied if business activity cools further, expectations that the US Federal Reserve will begin to tighten its monetary policy soon raise concerns about capital outflows from China.

Chinese leaders have pledged more support for the economy as the real estate recession weighs on investment and COVID-19 restrictions worsen consumption, while the recent local spread of the omicron variant poses a new challenge.

Cities across the country are imposing stricter virus restrictions, with the northern metropolis of Tianjin massively testing its 14 million residents, prompting some economists to trim growth prospects for 2022.

«We need a relatively loose monetary policy. How much we loosen depends on economic conditions, but the policy direction is clear,» Yu Yongding, an influential economist who previously advised the People’s Bank of China (PBOC), told Reuters.

The PBOC is likely to further reduce bank reserve requirements (RRRs) in the coming months, along with other quantitative tools, such as boosting credit through re-lending schemes and a medium-term credit facility, experts and economists said. More support for small businesses is also expected.

The PBOC last cut the RRR, the amount of cash banks must hold as reserves, by 50 standard basis points (bps) on December 15, its second such measure last year. This was followed by a 5 bp cut in the one-year loan prime rate (LPR), the benchmark lending rate, on December 20.

Lian Ping, chief economist at Zhixin Investment, has targeted one or two RRR cuts this year, while Xu Hongcai, deputy director of the economic policy commission of the China Political Science Association, expects steeper cuts.

«We definitely need to loosen policy as the downward pressure on the economy is relatively great,» said a monetary policy expert, speaking on condition of anonymity.

Room to cut the LPR is limited given that real interest rates are already low considering current price increases, economists said.

December factory-gate inflation slowed more than expected to 10.3% after government moves to contain high commodity prices, while consumer inflation fell to 1.5%, data showed officers on Wednesday.

The interest rate on the one-year benchmark loans stands at 3.8%.

The PBOC has said it will steer policy according to the country’s economic situation, although economists believe that the expected rate hikes from the Fed could reduce the rate differential between China and the United States, a situation that would fuel capital outflows. and it would impact the yuan.

($ 1 = 6.3648 Chinese yuan)

(Information by Kevin Yao. Edited in Spanish by Marion Giraldo)