China Rate Cut in Focus as Economy Counts Cost of Covid Zero
2022.05.13 06:57
China Rate Cut in Focus as Economy Counts Cost of Covid Zero
(Bloomberg) — China will likely report the weakest monthly economic indicators since the outbreak of the pandemic two years ago, putting pressure on the central bank to boost stimulus to support growth.
Economists are still divided though on whether the People’s Bank of China will move as early as Monday by cutting the interest rate on one-year policy loans. The central bank is having to weigh up the economy’s need for further monetary stimulus against concern that too much easing at a time when the US Federal Reserve is hiking rates will fuel capital outflows.
The PBOC’s rate decision is scheduled to come shortly before the government publishes monthly economic data revealing the extent of damage from Covid lockdowns in April in major hubs like Shanghai and elsewhere. The figures are likely to show a sharp deterioration in retail sales, industrial production and investment during the month.
The jobless rate, which is forecast to climb again to a two-year high, will also be in focus after top leaders made an urgent pledge recently to stabilize employment in the face of plunging business confidence.
Here’s a look at the rate decision and economic indicators, which are due Monday.
Policy Rate
Thirteen of the 25 economists polled by Bloomberg expect the rate on the one-year medium-term lending facility to stay unchanged at 2.85%. Of the 12 forecasting a reduction, five expect a 5 basis-point cut, six see a 10-point reduction, and only one predicts the rate to be slashed to 2.7%.
The PBOC is faced with a set of competing factors that are complicating policy considerations. The slump in economic activity in April is bolstering calls for more monetary easing to shore up growth. Some economists also argue the central bank needs to make use of the current easing window before more Fed rate hikes constrains its policy space.
Others point to factors that will restrict more easing: The PBOC has raised concerns about inflation pressure as well as tighter monetary policy at the Fed and elsewhere, which has triggered a sharp depreciation in the yuan against the dollar since late April and increased capital outflows.
“A benchmark rate cut may see limited room in the short term with Covid disruptions and Fed hiking, so the preferred mode of easing may shift back to quantity-based easing,” said Liu Peiqian, China economist at NatWest Group Plc.
In addition, some argue that commercial banks may be able to lower the loan prime rate — the de facto benchmark lending rate — at the end of next week even without a policy rate cut. The PBOC has guided banks to lower their deposit rates by 10 basis points in April, a move that allows them to lower lending rates without damaging their profits.
The PBOC has refrained from cutting policy rates since January and instead stepped up efforts to introduce new structural tools to help targeted sectors, disappointing investors who have called for more aggressive easing. Deputy Governor Chen Yulu said at a briefing Thursday the central bank has increased policy action and guided loan rates lower.
Read More: PBOC Says It’s Making Stabilizing Growth a Higher Priority
On Monday, the PBOC is likely to roll over the maturing 100 billion yuan ($15 billion) of medium-term loans without providing additional liquidity, according to 10 of the 15 economists polled by Bloomberg. The rest see a net injection of between 50 to 100 billion yuan.
Liquidity in the interbank market remains flush, after the PBOC cut the reserve requirement ratio, or the amount of cash banks must hold in reserves, in April. It has also transferred 800 billion yuan profit to the central government so far this year, which had the equivalent effect of a 0.4 percentage point RRR cut, according to a PBOC official.
In fact, a liquidity glut has pushed a gauge for short-term borrowing costs to the lowest level since 2020, well below the policy rate of the seven-day reverse repo. A key rate on one-year interbank loans also declined further below the MLF rate in May.
Jobs Slump
The pressure on China’s labor market is mounting as extended and widened lockdowns force more people out of jobs or to be furloughed. The outlook was already dim even before the outbreaks: a record number of graduates are expected to join the labor force this summer and China’s regulatory crackdown triggered large-scale layoffs at technology and after-school tutoring firms.
The urban surveyed jobless rate is expected to rise to 6% in April, the second highest on record after the peak of 6.2% in February 2020. Normally, the rate would drop in April after a seasonal spike around the Spring Festival.
That situation has made employment a top priority for policy makers, with officials issuing repeated and frequent calls to retain jobs. Pn Wednesday, Premier Li Keqiang said that both fiscal and monetary policies should make employment a priority and pledged to use multiple policy tools to stabilize jobs. Days earlier he warned of a “complicated and grave” job situation.
Li’s deputy Hu Chunhua also made similar calls for officials to “closely follow changes in the job situation and identify emerging problems in a timely manner.”
What Bloomberg’s Economists Say…
“China’s April activity data will probably make for a worrying read — driving home the extent of the damage to the economy from lockdowns in Shanghai and other parts of the country. Leading and high-frequency data are sounding alarms. Production and investment likely decelerated sharply and retail sales probably sank further.”
— Chang Shu, David Qu
See here for full report
Weak Consumption
Consumption likely deteriorated further in April after mobility restrictions were expanded nationwide. Economists expect retail sales contracted 6.2% last month, the worst since early 2020 when the coronavirus initially hit China.
The suspension of dining-out services in several provinces is set to deal a heavy blow to catering revenues, which accounts for roughly 10% of retail sales. Auto sales, another key component of retail sales, plunged the most in two years in April, as Covid-19 lockdowns in the car industry hubs of Shanghai and Jilin province disrupted production and kept buyers out of showrooms.
Factory Slide
Industrial output likely also slowed notably due to various restrictions. Factories in pandemic-hit areas were forced to close or maintain limited operation under the so-called “closed-loop system,” where employees are kept at factory locations and undergo regular Covid testing to prevent outbreaks.
Even if factories managed to stay open, output was capped by shortages of raw materials, long delays and a global supply chain crunch. Growth in industrial output is expected to weaken to 0.5% in April, according to a Bloomberg survey of economists. That would be the slowest pace since March 2020.
Investment growth for the first four months of the year likely eased to 7% from 9.3% in the first quarter, supported in large part by the government’s push to accelerate infrastructure projects. Property investment is forecast to contract 1.5% in the January-April period from a year earlier, which would be the first decline since May 2020, as sales and confidence in the sector continued to slump amid lockdowns.
©2022 Bloomberg L.P.
