Analysis – China’s monetary salvos do not escape key threat to economic growth

By Liangping Gao, Ellen Zhang and Marius Zaharia

BEIJING/HONG KONG (Reuters) – China’s central bank has shifted to a more aggressive easing stance, but its policy weapons are not aiming at the key enemy of economic growth: persistently weak consumer demand.

Liquidity injections and lower borrowing costs reported by the People’s Bank of China on Tuesday lifted market sentiment, but mainly because they raised expectations authorities will soon follow with a fiscal package to complement monetary and financial measures.

The world’s second-largest economy is facing strong deflationary pressures and risks missing its growth target of about 5 percent this year due to a sharp decline in property holdings and fragile consumer confidence, which analysts say only fiscal policies that they put money in consumers’ pockets through higher pensions and other social benefits. can be addressed.

“Central bank policies have exceeded expectations, but the main problem in the economy today is not lack of liquidity,” said Shuang Ding, chief economist for Greater China and North Asia at Standard Chartered.

“In terms of helping the real economy, I think there will be a different package of policies, particularly fiscal policies.”

HSBC’s chief Asia economist Fred Neumann agreed, saying the authorities needed to stimulate demand, which could be “achieved through other policy measures such as fiscal policy”.

While the PBOC unleashes its boldest set of measures since the pandemic, the overall size of the stimulus remains small and analysts doubt its overall effectiveness.

Given weak demand for credit from households and businesses, the 1 trillion yuan ($142 billion) that would be released into the financial system by a cut in bank reserve requirements could spur more sovereign bond buying than loans to the real economy.

Firms “have been unwilling for years to borrow, regardless of credit terms, because corporate sentiment is so weak,” China Beige Book said in a note.

“And households will not respond to weaker economic returns by suddenly becoming more bullish.”

The reduction in existing mortgage rates will release an additional 150 billion yuan annually to households. But that equates to just 0.12% of annual economic output, and some of that can be saved for early mortgage repayments.

Chinese consumers spend just 35 yuan of any extra 100 yuan they receive, estimates Raymond Yeung, chief economist for Greater China at ANZ.

The key interest rate cut by 20 basis points is higher than usual but lower than what most central banks usually do. The US Federal Reserve cut interest rates by 50 bps last week.

The story continues

“Each of the main monetary policy measures announced by the PBOC have already been used in the past and had minimal economic impact before,” Gavekal Dragonomics analysts said in a note, describing the scale of the package as “modest”.

“The significance of this package is therefore especially if it opens the door to other movements.”

MORE STIMULUS?

By injecting liquidity, the PBOC gives the government more room to issue debt for any additional stimulus, Neumann said.

“What the market hopes is that the liquidity injections signal a potential announcement in the coming weeks for a large bond issuance program,” he added.

Lynn Song, chief economist for Greater China at ING, says the most direct way to boost the economy in the short term is through more government investment, although “economists are increasingly in favor of demand-side support, which would it could come in the form of consumer vouchers or similar policies.”

The path taken is investment. Last October, to ensure the 2023 growth target is met, Beijing announced an additional 1 trillion yuan in special treasury bonds to finance various infrastructure projects.

It’s unclear how different any additional stimulus would be this year.

Officials in July signaled a marginal shift in consumer spending by subsidizing purchases of new appliances and other goods. It was seen as a small step in the direction many economists have been calling for Beijing to take for years to address its large investment-consumption imbalance.

The share of household consumption in annual economic output is about 20 percentage points below the global average, while the share of investment – government-led, debt-fuelled and with diminishing returns – is 20 points above.

This could be addressed through transfers from the public sector to consumers.

Nomura analysts said in a note on the PBOC package that Beijing could increase pensions and medical benefits for low-income groups and subsidize childbirth to make some progress in rebalancing its economy.

But they warn that such steps may not be imminent.

“We do not believe that these monetary and financial policies are enough to stop the economic deterioration from slowing,” they said.

“We think fiscal stimulus should come first, although we encourage investors to manage their expectations.”

(1 USD = 7.0331 Chinese Yuan Renminbi)

(Writing by Marius Zaharia; Editing by Shri Navaratnam)