China Rethinks its Monetary Policy

By Glenn Dyer | More Articles by Glenn Dyer

China this week implicitly acknowledged the failure of its monetary policy loosening over the past six months aimed at halting the slide in the economy and especially the faltering property sector by announcing two separate interest rate cuts within four days.

The cuts are the latest in a growing number of monetary policy easings that have or will release more than half a trillion dollars in added stimulus in six months to no effect.

China has in fact cut key interest rates or bank reserve asset ratios seven times since last July in an effort to halt the slide in the economy with four of those rate cuts coming this week.

The latest cuts came only days after we saw the bizarre sight of China’s President Xi Jinping calling for western central banks to hold off on raising interest rates in a monetary policy tightening.

His call illustrated how the Chinese economy, and perhaps Xi’s position itself, is a lot weaker than commonly assumed. The four rate cuts this week underline the weakness in the economy and the absurdity of Xi’s call.

The one continuing success for the Chinese economy is exports — China hit a new record for exports in 2021 and for 15 months in a row up to through December.

But Xi currently has little else going for him: domestic demand in China is weak — retail sales have hardly moved since mid-year, and growth in imports slowed noticeably at the end of 2021.

That’s why the best stimulus for him and China (apart from a real easing in monetary policy) is for Western consumers to go on spending furiously — and Western central banks to hold off on anything that might discourage them.

The latter is unlikely given the US Federal Reserve meeting next week could kick off rate rises from a number of other central banks (the rises from the Bank of England the RBNZ are not material) this year. US markets are expecting three from the Fed, with the first possibly this week or in March.

The four cuts this week follow the weak 4th quarter and 2021 GDP data and monthly production, investment (especially weakening property) and retail sales for December and the final months of 2021.

This week’s cuts were aimed at trying to help property – particularly housing – sector which is where the impact of the ham-fisted policies from President Xi Jinping and his government that first promoted a boom and then tried to crunch it

China’s central bank cut its benchmark lending rates again on Thursday, three days after earlier cuts to other key rates.

The People’s Bank of China trimmed the one year prime loan rate by 10 basis points from 3.8% to 3.7%. In December, the central bank cut the rate for the first time since April 2020.

The five-year loan prime rate was lowered by 5 basis points from 4.65% to 4.6% — it was the first cut since April 2020, at the height of the coronavirus pandemic in the country.

Loan prime rates (LPR) affect the lending rates for corporate and household loans in the country.

Most new and outstanding loans in China are based on the one-year LPR, but the five-year rate influences the pricing of home mortgages.

On Monday China’s central bank cut the interest rates of its medium-term lending facility (MLF) loans and reverse repos by 10 basis points amid the country’s efforts to lower lending cost and further shore up economic growth.

The rate cuts continue the PBOC’s efforts to push down borrowing costs, according to Capital Economics.

“Mortgages will now be slightly cheaper which should help shore up housing demand. The PBOC has already pushed banks to increase the volume of mortgage lending,” Sheana Yue, China economist at the firm, said in a note following the announcement.

“Targeted support for property buyers does appear to be limiting one of the more severe downside risks facing the economy,” Yue added.

However, Nomura’s Chief China Economist Ting Lu said the impact of the Thursday’s cuts “will be quite limited, as these cuts are too small to have a material impact.”

“They are unlikely sufficient to clear up the real bottlenecks, and because rates on existing mortgage loans will not be reset this year,” he wrote.

Nomura expects further cuts to the one-year and five-year LPR as well as the reserve requirement ratio, and a “significant rise in FX purchases to add liquidity and limit [renminbi] appreciation over the next few months.”

China twice cut bank asset reserve ratios – in July and in early December which released more than $US350 billion.

But much if this went to repaying short and medium term loans and the repo cuts on Monday will have a similar effect.

While relieving pressures on banks is a good idea, there is little in the way of direct stimulus reaching the wider economy, so standby for bigger rate cuts as the Xi administration struggled to hold the economy together.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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