China’s central bank likely to cut interest rate again

Bloomberg

China’s central bank is expected to cut its key policy interest rate for the second time this year on Friday and reduce the reserve requirement ratio within days to help bolster a faltering economy under strain from Covid lockdowns.
Sixteen of the 22 economists surveyed by Bloomberg predict the People’s Bank of China will lower the interest rate on one-year policy loans — 12 of them forecast a 10 basis-point reduction to 2.75% and four expect a 5-point drop. The rest see no change.
The PBOC is also likely to reduce the RRR — the amount of cash that banks must hold in reserve — after the State Council, China’s cabinet, hinted strongly of a cut, saying it would lower the ratio “at an appropriate time.” The two previous RRR cuts, in July and December last year, came days after a similar signal from either the State Council or Premier Li Keqiang.
Growth projections for China are being steadily downgraded and senior officials have given repeated warnings about the outlook, highlighting the seriousness of the situation. The government has pledged more fiscal and monetary stimulus to boost the economy as its growth target of around 5.5% looks increasingly precarious.
Excitement among traders about the imminent RRR cut quickly evaporated, however, with the liquidity-sensitive ChiNext Index dropping as much as 1% in morning trading on Thursday after opening 1.2% higher, as concerns over Covid controls remain.
Lockdowns and other virus control measures have led to logistics bottlenecks and shutdowns of factories owned by Volkswagen AG, iPhone maker Foxconn Technology Group and others. Spending on tourism and car sales have plunged, while food prices are rising.
Economists now predict economic growth will slow to 5% in 2022.
The State Council said it will “step up financial support to the real economy, especially industries and small businesses that have been hit hard by the pandemic.”
The central bank lowered the rate on one-year policy loans — the medium-term lending facility — by 10 basis points in January.
The PBOC’s easing is in stark contrast to the U.S. Federal Reserve, which has turned more hawkish recently to combat surging inflation. That divergence means the PBOC will quickly run out of time to cut rates, making an April move likely, many economists say. Aggressive rate hikes from the Fed would reduce foreign investors’ appeal for Chinese assets, fueling capital outflows and putting pressure on the yuan.
The yield premium of China’s 10-year government bond over Treasuries already vanished earlier this week for the first time since 2010.
“This could be the last chance for China to have a monetary easing move in the near term before the Fed’s potential balance sheet shrink,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. “China may have RRR cuts soon.”