Employees wearing face masks work on a car seat assembly line at the Yanfeng Adient factory in Shanghai, China, as the country is hit by an outbreak of a novel coronavirus on February 24, 2020. REUTERS / Aly Song / File Photo

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BEIJING, Jan. 12 (Reuters) – China’s central bank to unveil additional easing measures to support slowing growth, although it will likely prefer to inject more liquidity into the economy rather than cut rates too aggressively, insiders and economists have said.

While some analysts believe modest rate cuts could still be considered if business activity slows further, expectations that the US Federal Reserve will soon begin to tighten monetary policy will raise concerns about capital outflows from China.

Chinese leaders have pledged to further support the economy as a real estate slowdown weighs on investment and strict COVID-19 restrictions hit consumption, the recent local spread of the highly contagious variant of Omicron posing a new challenge.

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Cities across the country are putting tougher brakes on viruses, with northern metropolitan Tianjin massively testing its 14 million residents, prompting some economists to scale back growth prospects for 2022. Read more

“We need a relatively loose monetary policy. The degree of easing depends on economic conditions, but the policy direction is clear,” Yu Yongding, an influential economist who previously advised the People’s Bank of Canada, told Reuters. China (PBOC).

The PBOC is expected to further reduce bank reserve requirement ratios (RRRs) in the coming months, alongside other quantitative tools, such as stimulating credit through repayment programs and the medium-term loan facility, have said insiders and economists. More support is also expected for small businesses.

The PBOC last cut the RRR – the amount of cash banks must hold as reserves – by 50 basis points (bps) as standard on December 15, its second such move last year. This was followed by a 5bp cut in the one-year prime rate (LPR), the key lending rate, on December 20.

Lian Ping, chief economist at Zhixin Investment, has forecast one or two RRR cuts this year, while Xu Hongcai, deputy director of the Economic Policy Committee of the China Association of Political Science, expects more cuts. important.

“We absolutely have to relax the policy because the downward pressure on the economy is relatively high,” said one political insider, who spoke on condition of anonymity.

Tao Wang, chief economist for China at UBS, told reporters on Tuesday that she expected the next RRR cut to come in March or April, but she also expects the PBOC to keep the RRR cut. LPR stable.

The margin for reducing the LPR will be limited given that real interest rates are already low given the current price hikes, economists said.

Inflation at the December factory exits slowed to 10.3% more than expected after government measures to contain high commodity prices, while consumer inflation slowed to 1.5%, according to official data released Wednesday. Read more

The benchmark lending rate at one year is 3.8%.

The PBOC said it would orient its policy according to China’s economic situation, although economists believe the expected Fed rate hikes could narrow the China-U.S. Rate gap, fueling capital outflows. and weighing on the yuan.

Some of the biggest Wall Street banks expect four increases in US interest this year, starting in March a more aggressive call read more

China’s strong trade surplus and its capital controls could shield the economy from a sudden flight of capital that could plague other emerging economies such as Turkey, economists said.

“Although this (the Fed’s rate hike) may put constraints on our monetary policy, we can maintain our political independence,” said Yu, the former PBOC adviser.

“In other words, if we want to cut interest rates or relax policy, we can do it,” he said.

China’s fourth-quarter growth likely slowed to 3.1% year-on-year from 4.9% in the third quarter, according to a report by BofA Global Research. The data will be communicated on January 17th.

Goldman Sachs has reduced its China growth forecast for 2022 to 4.3% from 4.8% due to the latest developments related to COVID-19. He expects RRR to decline by 50bp in the first quarter and 10bp in one-year LPR in the first half.

“A POLITICAL ISSUE”

Chinese policymakers focused on reducing real estate and debt risks last year, which made the economic slowdown worse. But they have sought to push back a sharper slowdown that could lead to job losses ahead of a key Communist Party convention later this year.

New bank loans likely hit a record high in 2021 for the second year in a row, according to a Reuters poll. Read more

“All regions and departments should take responsibility for stabilizing the economy, which is not only an economic issue, but also a political issue,” said Han Wenxiu, deputy director of the Central Commission for the Commission. financial and economic affairs, in a press release. article published last week.

“All parties should actively introduce policies conducive to economic stability and carefully introduce policies with contractionary effects,” Han wrote in Outlook Weekly.

Chinese leaders aim to achieve economic growth of at least 5% by 2022 to contain unemployment, political sources said.

China is expected to increase budget spending this year to boost infrastructure investment, with an annual budget deficit ratio and a special quota of local government bonds largely in line with those of 2021.

In 2021, China set a budget deficit of 3.2 percent of GDP and a quota of 3.6 trillion yuan ($ 573.44 billion) on special bonds.

Policymakers are likely to ease some property restrictions to avoid a hard landing, but any fundamental policy change seems unlikely as they remain concerned about property bubbles, they said.

($ 1 = 6.3651 Chinese renminbi yuan)

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Reporting by Kevin Yao; Editing by Kim Coghill

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