China announced plans for a rare economic briefing by three top financial regulators as it cut one of its short-term interest rates, raising speculation that officials are preparing to step up efforts to revive growth.
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Authorities announced Monday that central bank governor Pan Gongsheng would hold a press conference tomorrow on financial support for economic development, along with other officials. Minutes later, the People’s Bank of China cut its 14-day reverse repurchase rate, matching the cuts it began in July.
Taken together, these moves reinforce expectations that the People’s Bank of China will cut interest rates, after the US Federal Reserve finally began cutting rates last week. The central bank also recently signaled that it is preparing additional policy. A string of disappointing data in August has raised concerns that President Xi Jinping’s government may miss its 5% annual growth target without more support.
The yield on China’s 10-year government bonds fell one basis point to a fresh low of 2.03%, a sign that traders are pricing in more monetary stimulus. In the foreign exchange market, the People’s Bank of China raised its daily reference rate for the yuan to 7.0531 against the dollar, putting the key level of 7 in sight.
“I expect the PBOC to cut the seven-day reverse repo rate and the reserve requirement ratio in the coming months,” said Chui Zhang, president and chief economist at Pinpoint Asset Management, referring to the new benchmark interest rate. He added that Tuesday’s press conference will give financial regulators an opportunity to “shed light on their policy stance.”
In January, Pan used a similar briefing to announce a cut in the amount of money banks must hold in reserve — the reserve requirement ratio — two weeks ahead of schedule, as authorities tried to stem a $6 trillion stock market rout. The PBOC governor has shown a more transparent approach to policy during his first year in office as officials try to shore up confidence.
But a series of interest rate cuts in recent months hasn’t been enough to stimulate an economy that expanded at its slowest pace in five quarters. A years-long property crisis that wiped out an estimated $18 trillion in household wealth has dampened spending and pushed China into its longest contraction since 1999.
This meant that real interest rates – which are adjusted for changes in prices – remained high, blunting the impact of any moderate easing. The sharp decline in revenues from land sales also curbed fiscal spending, leaving debt-laden local governments struggling to pay their bills and with little bandwidth to invest in growth-boosting projects.
In a recent Bloomberg Economics survey, economists said implementing the housing rescue package China unveiled in May was the most effective step officials could take to meet the growth target. So far, turnout has been weak, with just 29 of about 200 cities responding to the call to absorb the housing surplus.
“It is also necessary for the People’s Bank of China to instruct the current mortgage interest rates to be lowered,” said Xiaojia Qi, chief China economist at Credit Agricole, in response to Monday’s rate cut.
China has a chance on Wednesday to cut its annual borrowing costs, which officials have downplayed in recent months in favor of short-term interest rates to guide the market. That means the People’s Bank of China may choose to cut the new rate before making any changes to its medium-term lending facility.
Underscoring the shift in sequence, the central bank in July cut its seven-day reverse repo rate days before cutting its long-term lending rate by the most since April 2020.
The People’s Bank of China’s decision to cut the 14-day interest rate to 1.85% from 1.95% on Monday came ahead of a seven-day National Day holiday starting on Oct. 1. The People’s Bank of China typically offers 14-day loans ahead of the long holiday, and last did so in February ahead of the week-long Lunar New Year holiday.
“A 10bp rate cut alone is not enough to halt the weakening economic momentum. A bigger package is needed,” said Raymond Young, chief economist for Greater China at ANZ Bank. “Other policy measures in the toolbox are likely to be announced, such as lowering the reserve requirement ratio, cutting short-term loans and lowering mortgage rates.”
–With the help of Wenjin Lv, Iris Ouyang and Josh Xiao.
(Updates with details and analyst commentary.)
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