China lays the groundwork to tackle the founding economic reform

With tax breaks and hints at more loans for small businesses, Chinese state planners this week began responding to a problem already felt by many consumers and investors: The world’s second-largest economy is in trouble.

After months of disappointing data, economists and traders expect the government to cut the headline policy interest rate on Thursday for the first time in nearly a year.

Such a move has been preceded by a stream of easing measures to boost financial sector liquidity. Policymakers cut the overnight bank lending rate on Tuesday, while the six biggest banks slashed deposit rates last week.

But many economists believe a slump in assets, weak business, record youth unemployment and a lack of optimism will require stronger action to reinvigorate the economy, at a time when many had hoped that it will rebound.

Ting Lu, Nomura’s chief China economist, said of the expected rate cut, “It is not enough.” “The real reason for weak growth is no longer about high interest rates. It’s more about faith about the future.

Six months after authorities abandoned a zero-Covid regime that cut the country off from the rest of the world, China’s economy remains a global isolate. Beijing did not implement the fiscal or monetary stimulus employed by other economies during the pandemic. While many policymakers are now fighting to contain inflation, China’s prices are stable.

The country’s reopening, anticipated to boost the global economy, has also failed to revive animal spirits at home.

“We thought things would get much better after the post-Covid situation opened up, and now it’s not turning that way,” said Zhu Tian, ​​an economics professor at the China Europe International Business School in Shanghai. “Whatever happened during the last three years has clearly lowered the mood of the people.”

China’s stimulus situation is the early stage of the epidemic. In mid-2020, China, like other major economies, experienced a boom in house and stock prices, prompting warnings of a bubble from top regulators. Policymakers moved to bring down the heavily indebted property market, triggering a crisis across the sector and driving developers into default. The construction work has come to a standstill.

In contrast to policies designed to directly support households and businesses in the US and Europe, Beijing spent heavily on manufacturing anti-Covid equipment, mandating mass testing and imposing citywide lockdowns, which stunted growth. stopped the

Thursday’s data will provide further indications of Beijing’s chances of meeting its already modest target of 5 percent economic growth, the lowest target in decades. The property market, which has been stuck in a prolonged slump since 2021, is yet to recover, with new home sales in 30 major cities this quarter accounting for only 75 per cent of 2019 levels, according to Macquarie.

In early 2020, the People’s Bank of China reduced the headline medium-term lending facility (MLF) rate from 3.3 percent to 2.95 percent, but has since reduced the rate slightly further to 2.75 percent. According to market participants, the central bank is expected to reduce the rate by only 10 basis points on Thursday, the same amount by which it slashed the reverse repo rate this week.

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Expectations of a rate cut have been rising in closely watched official statements. According to Macquarie’s chief China economist Larry Hu, a move towards easing has been signaled in terms of “strengthening countercyclical adjustments” by People’s Bank of China Governor Yi Gang this month. Hu said, “Another policy turning point is coming.”

Economists largely agree that any dramatic change in monetary policy is unlikely. In a recent private meeting, officials including PBoC deputy governor Liu Guoqiang argued against relying solely on monetary stimulus, according to a person present.

Erin Shin at HSBC said low inflation gives the PBOC “room to act if needed”, but she did not expect “massive stimulus”. Zhu at the China Europe International Business School noted that the government was limited by downward pressure on the exchange rate.

Analysts expect the MLF rate cut to be accompanied by non-monetary measures. Hu at Macquarie forecast a coordinated relaxation of restrictions on property purchases, infrastructure spending and bank lending.

Chetan Ahya, Morgan Stanley’s chief Asia economist, estimated an infrastructure package of Rmb1tn ($140bn) and tax subsidies for consumers. “Taken together, we think in the second half you should see a recovery broaden with this policy support,” he told a media briefing on Tuesday.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

The specter of inflation still deters more forceful action. Guan Tao, chief economist at Bank of China International and former director of the State Administration of Foreign Exchange, said, “Western economies have gone too far in directly subsidizing enterprises and distributing money to households – they are paying the price of inflation.” Are.” “But we’re a little too conservative.”

There are mixed signals on the ground as well. In Shanghai’s Pudong district, financial workers crowd luxury goods shops on their lunch break. But in a nearby mall, the retail space is boarded up, and the shops that are open are eerily silent. A Toys R Us store assistant blamed the lack of tourists, saying, “It hasn’t come back since last year.”

An economic researcher at a mutual fund in Shanghai cited recent consumption support in sectors such as cars, but did not expect more radical measures, such as cash handouts distributed for spending in Hong Kong.

Amid anticipation of this week’s easing, some observers expect a sudden departure from China’s cautious approach to the Covid era. But some believe it is needed now.

“It must be something completely different,” Zhu said. “What China needs is a positive shock wave that will change the mood of the entire business community.”

Additional reporting by Wang Zhuqiao in Shanghai and Andy Lin and Hudson Lockett in Hong Kong

With tax breaks and hints at more loans for small businesses, Chinese state planners this week began responding to a problem already felt by many consumers and investors: The world’s second-largest economy is in trouble.

After months of disappointing data, economists and traders expect the government to cut the headline policy interest rate on Thursday for the first time in nearly a year.

Such a move has been preceded by a stream of easing measures to boost financial sector liquidity. Policymakers cut the overnight bank lending rate on Tuesday, while the six biggest banks slashed deposit rates last week.

But many economists believe a slump in assets, weak business, record youth unemployment and a lack of optimism will require stronger action to reinvigorate the economy, at a time when many had hoped that it will rebound.

Ting Lu, Nomura’s chief China economist, said of the expected rate cut, “It is not enough.” “The real reason for weak growth is no longer about high interest rates. It’s more about faith about the future.

Six months after authorities abandoned a zero-Covid regime that cut the country off from the rest of the world, China’s economy remains a global isolate. Beijing did not implement the fiscal or monetary stimulus employed by other economies during the pandemic. While many policymakers are now fighting to contain inflation, China’s prices are stable.

The country’s reopening, anticipated to boost the global economy, has also failed to revive animal spirits at home.

“We thought things would get much better after the post-Covid situation opened up, and now it’s not turning that way,” said Zhu Tian, ​​an economics professor at the China Europe International Business School in Shanghai. “Whatever happened during the last three years has clearly lowered the mood of the people.”

China’s stimulus situation is the early stage of the epidemic. In mid-2020, China, like other major economies, experienced a boom in house and stock prices, prompting warnings of a bubble from top regulators. Policymakers moved to bring down the heavily indebted property market, triggering a crisis across the sector and driving developers into default. The construction work has come to a standstill.

In contrast to policies designed to directly support households and businesses in the US and Europe, Beijing spent heavily on manufacturing anti-Covid equipment, mandating mass testing and imposing citywide lockdowns, which stunted growth. stopped the

Thursday’s data will provide further indications of Beijing’s chances of meeting its already modest target of 5 percent economic growth, the lowest target in decades. The property market, which has been stuck in a prolonged slump since 2021, is yet to recover, with new home sales in 30 major cities this quarter accounting for only 75 per cent of 2019 levels, according to Macquarie.

In early 2020, the People’s Bank of China reduced the headline medium-term lending facility (MLF) rate from 3.3 percent to 2.95 percent, but has since reduced the rate slightly further to 2.75 percent. According to market participants, the central bank is expected to reduce the rate by only 10 basis points on Thursday, the same amount by which it slashed the reverse repo rate this week.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

Expectations of a rate cut have been rising in closely watched official statements. According to Macquarie’s chief China economist Larry Hu, a move towards easing has been signaled in terms of “strengthening countercyclical adjustments” by People’s Bank of China Governor Yi Gang this month. Hu said, “Another policy turning point is coming.”

Economists largely agree that any dramatic change in monetary policy is unlikely. In a recent private meeting, officials including PBoC deputy governor Liu Guoqiang argued against relying solely on monetary stimulus, according to a person present.

Erin Shin at HSBC said low inflation gives the PBOC “room to act if needed”, but she did not expect “massive stimulus”. Zhu at the China Europe International Business School noted that the government was limited by downward pressure on the exchange rate.

Analysts expect the MLF rate cut to be accompanied by non-monetary measures. Hu at Macquarie forecast a coordinated relaxation of restrictions on property purchases, infrastructure spending and bank lending.

Chetan Ahya, Morgan Stanley’s chief Asia economist, estimated an infrastructure package of Rmb1tn ($140bn) and tax subsidies for consumers. “Taken together, we think in the second half you should see a recovery broaden with this policy support,” he told a media briefing on Tuesday.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

The specter of inflation still deters more forceful action. Guan Tao, chief economist at Bank of China International and former director of the State Administration of Foreign Exchange, said, “Western economies have gone too far in directly subsidizing enterprises and distributing money to households – they are paying the price of inflation.” Are.” “But we’re a little too conservative.”

There are mixed signals on the ground as well. In Shanghai’s Pudong district, financial workers crowd luxury goods shops on their lunch break. But in a nearby mall, the retail space is boarded up, and the shops that are open are eerily silent. A Toys R Us store assistant blamed the lack of tourists, saying, “It hasn’t come back since last year.”

An economic researcher at a mutual fund in Shanghai cited recent consumption support in sectors such as cars, but did not expect more radical measures, such as cash handouts distributed for spending in Hong Kong.

Amid anticipation of this week’s easing, some observers expect a sudden departure from China’s cautious approach to the Covid era. But some believe it is needed now.

“It must be something completely different,” Zhu said. “What China needs is a positive shock wave that will change the mood of the entire business community.”

Additional reporting by Wang Zhuqiao in Shanghai and Andy Lin and Hudson Lockett in Hong Kong