Possible macroeconomic measures should boost Chinese growth

Expectations for accommodative monetary policy rose as an official signaled that China was willing to provide stronger policy support for the economy next year, experts said on Monday.

According to them, the Chinese economy still needs lower interest rates and other countercyclical measures to adjust to a recovery in consumption and investment in the face of the pressure from COVID-19, as well as help the real estate sector regain some momentum.

“It would be wise to increase support as soon as possible for key interest rate adjustments,” said Zhang Bin, deputy director of the Institute of Global Economics and Politics at the Chinese Academy of Sciences. social Sciences.

The scale of next year’s rate cuts is expected to be larger than this year’s, aimed at boosting consumption and investment while addressing weakness in the real estate sector, Zhang noted, adding that it was also advised to subsidize the house-buying activities of low-income residents by offering interest rate reductions.

He said stronger monetary support was a necessity, as simply relying on the economy’s endogenous recovery momentum might not bring growth back to a level comparable to the country’s potential growth rate, given given the damage caused by COVID-19 on the financial situation and on the risk appetite of market participants.

Lowering interest rates to an appropriate extent could reduce the debt burden of consumers and businesses, raise the prices of the assets they hold, and thus increase their cash available for spending, Zhang said.

Zhang’s remarks echo remarks made by Liu Guoqiang, vice-governor of the People’s Bank of China (PBC, the country’s central bank), over the weekend. Liu told a forum that next year’s monetary policy strength on the global front should not be lower than this year’s and should be further increased if necessary unless the economic growth and inflation are not exceeding expectations.

Aiming to provide “adequate” overall support to the real economy in 2023, Liu said the BPC has relatively abundant policy tools, with room for quantitative and tariff instruments.

Since the beginning of the year, the BPC has reduced the medium-term loan facility rate (MLF, for medium-term lending facility) – a key political benchmark – by 20 basis points in total, reaching 2.75% on Thursday.

Liu’s remarks suggest MLF rate cuts in 2023 may not be less than 20 basis points, a report by Guosheng Securities on Monday said, adding that liquidity in financial markets is unlikely is experiencing a tightening trend as the BPC remains determined to maintain reasonably sufficient liquidity.

At the Central Economic Work Conference, which ended on Friday, it was stressed that reasonable and sufficient liquidity should be maintained as part of a “targeted and effective” prudent monetary policy.

Still, some experts remain cautious about the possibility of interest rate cuts. They cited the ongoing economic rebound, along with the potential rise in inflation, as the main reasons that could deter the BPC from adding stimulus.

“Given the backdrop of a significant rebound in economic growth, it is unlikely to see interest rate cuts and reductions in bank reserve requirements in 2023,” said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

Although the MLF rate may remain unchanged, the Loan Prime Rate (LPR, for loan prime rate) over five years — a market-driven benchmark for mortgage rates — could decline further to reduce home buying costs and stabilize the real estate sector, Wang said.

China is expected to unveil the latest one-year and more than five-year LPRs on Tuesday. The five-year LPR, some experts said, could fall as soon as Tuesday, after registering a slide of 35 basis points in total this year to 4.3%.

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