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

China’s central bank is poised to unveil further easing measures to cushion the slowdown in growth, although 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 Federal Reserve (Fed) of the United States 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 tighter virus restrictions, with the northern metropolis of Tianjin conducting massive testing of its 14 million residents, prompting some economists to cut 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“, He said Yu Yongding, an influential economist who previously advised the People’s Bank of China (PBOC).

It is likely that the PBOC further reduce bank reserve requirements (RRR) 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 it 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 of Zhixin Investment, has targeted one or two RRR cuts this year, while Xu Hongcai, deputy director of the economic policy commission of the China Association of Political Sciences, expects steeper cuts.

“We definitely need to loosen the policy as the downward pressure on the economy is relatively great”Said a monetary policy expert, who spoke 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%, official data showed on Wednesday.

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

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