Tags: China | economy | PBOC | stimulus

China's Slowdown Seen Yet to Hit Bottom Even After PBOC Action

Wednesday, 17 September 2014 12:29 PM

China’s growth trajectory is still pointing down, even after an $81 billion liquidity injection.

The People’s Bank of China move to provide 500 billion yuan of three-month funds to the nation’s five largest banks will help overcome any pre-holiday cash crunch, though is unlikely to move the needle on gross domestic product, according to economists at banks including Barclays Plc.

With Premier Li Keqiang vowing he won’t be distracted by short-term fluctuations as he maintains focus on structural adjustments, the fate of his 7.5 percent expansion target hinges on whether the injection marks the start of more easing or is just a temporary liquidity measure. UBS AG said it will take a deeper slowdown to spur an interest-rate cut as it reiterated a call growth will slide below 7 percent next quarter.

“The bias is toward a bit more easing, but the steps are still relatively measured,” said Wang Tao, chief China economist at UBS in Hong Kong. “Growth will slow further in the fourth quarter, dragged down by further property construction weakness. That will bring about more policy support.”

The PBOC move was described by a government official familiar with the matter, who asked not to be identified because the measure hasn’t been formally announced. The Beijing-based central bank hasn’t commented on reports about the action and didn’t respond to faxed questions yesterday.

Press officers for the five banks, including Industrial & Commercial Bank of China Ltd., declined to comment.

Shares Rally

News of the move spurred the first gain in six days for the Hang Seng China Enterprises Index, which rose 1.6 percent, while the yuan halted a four-day decline.

The PBOC’s targeted easing measures since June, including selective reserve-requirement cuts and other lending, have had a limited impact on the broader economy and probably only temporary effects on liquidity and stocks, Chang Jian, chief China economist at Barclays, said in a note yesterday.

“We do not think the expected targeted easing measures can arrest the moderating momentum,” Chang wrote.

Economists surveyed by Bloomberg News last month saw China’s growth slowing to 7.2 percent in 2015 from a projected 7.4 percent this year, based on median estimates. Analysts including Chang and Louis Kuijs at Royal Bank of Scotland Group Plc reduced forecasts after monthly data released Sept. 13 showed the weakest industrial-output expansion since the global financial crisis and moderating investment and retail sales growth.

More Stimulus

Lu Ting, head of Greater China economics at Bank of America Corp., said in a note that Premier Li “will be forced to significantly step up its stimulus measures in coming weeks to arrest the slowdown.”

Sina.com reported that the PBOC provided the funds under a program called the standing lending facility, introduced last year as a collateralized provision of funds to meet large-scale demands for financial institutions’ long-term liquidity and to help address fluctuations in money-market rates.

While the action was probably driven by considerations including economic weakness and liquidity volatility around the weeklong National Day holiday that starts Oct. 1, the fact that the PBOC used the SLF instead of a cut in banks’ reserve requirements suggests that the “central bank does not want the market to interpret it as a clear sign of monetary easing,” JPMorgan Chase & Co. economists wrote in a report.

Reserve Requirements

The central bank has left reserve requirements for the largest banks and benchmark interest rates unchanged for more than two years.

Julian Evans-Pritchard, China economist for Capital Economics Ltd. in Singapore, said policy makers are being “relatively calm” and are trying to avoid spurring too much credit expansion as the nation makes a transition to a more services-based economy. “This is partly just fine tuning in order to make sure that the pace of the slowdown is not too extreme,” he said.

China’s bonds advanced along with the yuan and stocks yesterday. One-year interest-rate swaps dropped to the lowest since June.

“I see it more as a technical matter related to money- market liquidity than a macro policy move, they are comfortable with the outlook,” said Tim Condon, head of Asia research at ING Groep NV in Singapore, who formerly worked at the World Bank. “But it does leave us scratching our heads over the question of whether we’ve interpreted this correctly.”

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China's growth trajectory is still pointing down, even after an $81 billion liquidity injection.
China, economy, PBOC, stimulus
Wednesday, 17 September 2014 12:29 PM
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