22 March 2019
China's central bank is boosting liquidity to support economic activity, but is holding off on stronger monetary easing for now. Photo: CNSA
China's central bank is boosting liquidity to support economic activity, but is holding off on stronger monetary easing for now. Photo: CNSA

PBoC remains cautious on structural easing

China’s central bank has added 28-day reverse repos this week to smooth out cash demand in the run-up to Lunar New Year holidays, after it resumed 7-day reverse repos the week before. There has been net injection of funds into the market for two straight weeks, albeit on a small scale.

The People’s Bank of China (PBoC) has extended the operation cycle of reverse repos ahead of the holiday next month. However, the amount has lagged expectation while the pricing was very high.

That suggests that the central bank is still adopting a cautious approach in implementing structural easing measures, according to market analysts.

The monetary policy will remain “properly loose” given mounting pressure on renminbi and stalling economic growth. However, aggressive measures like cutting rate for reverse repo or reserve-requirement ratio may not be launched. And the central bank is likely to step up targeted financing and open market operations before the holiday.

The duration of the 28-day reverse repo just fits the aim of adjusting pre-holiday liquidity, yet the price has not sent any clear signal to the market, according to Liu Changjiang, fixed-income analyst at Essence Securities.

Across-board easing is unlikely to occur in the first quarter, as a key government work report is yet to be finalized. Also, the economic figures have not painted a clear picture of the growth trend. Therefore, the government policy will remain unchanged, holding off aggressive measures like RRR cut until after the holiday or until the second quarter when the picture is clearer, the analyst said.

Premier Li Keqiang noted on Monday that there are various issues accompanying each other, which has complicated the governmental macro control. Therefore, the government has to figure out new ways and mindset in energizing the economy. The macro policy will stick to the basic orientation but also needs to be flexible and target special issues.

In the short term, domestic stock market bubble and financial risks in neighboring nations are among the top concerns for China to switch to across-board monetary easing. However, the central bank looks set to step up liquidity injection ahead of the holiday given rising pressure of capital outflow amid weaker currency. Nevertheless, the bank still holds a conservative stance in managing liquidity.

In the long run, sluggish economic growth and weaker renminbi will set the stage for quantitative monetary easing, according to Yang Hao, fixed-income analyst at Nanjing Securities. The latest data shows that pessimistic economic outlook lingers, and the stock market is also losing some heat. Therefore, that would pave the way for monetary easing at “proper time”.

Last year, China’s industrial profits rose 3.3 percent year-on-year, with the growth rate down 8.9 percentage points compared to the previous year. And the profits slumped a record 8 percent last month, compared with 4.2 percent decline in November. The drop highlights the challenges in the economic slowdown.

As a result, the central bank returned to its traditional approach of open market operation like reverse repos, instead of previous non-public operation like medium-term lending facility (MLF). The switch is aimed at sending a clear message to the market and guide expectations.

This arcticle appeared in the Hong Kong Economic Journal on Jan. 30.

Translation by Julie Zhu

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Department of Investment Analysis at HKEJ

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