PBOC Vows Stronger Pro-Growth Policy But Leaves Details Vague

(Bloomberg) --

The People’s Bank of China said it’ll resort to “more powerful” policies to counter unprecedented economic challenges from the coronavirus pandemic, without giving further details on what measures it will use.

The central bank will “work to offset the virus impact with more powerful policies,” paying more attention to economic growth and jobs while it balances multiple policy targets, the PBOC said in its quarterly monetary policy report, released Sunday. It reiterated that prudent monetary policy will be more flexible and appropriate and it’ll keep liquidity at a reasonable level.

The remarks reflect the PBOC’s growing concern over the unprecedented economic downturn and the risk of a second quarter of contraction, given sluggish domestic demand and the collapsing global economy. While the central bank has increased liquidity supply to banks and eased rules on banks’ buffers to allow them to extend more credit, the scale of the stimulus is limited compared to other major economies globally.

“Monetary policy will be strengthened and focused on helping the real economy resume development, including recovery in production, consumption and domestic demand,” Ming Ming, head of the fixed-income research at Citic Securities Co. in Beijing, wrote in a note. “The pace of that will be measured in accordance with inflation and exchange rate.”

The government is set to release macro economic data for April later this week. Along with keeping jobs and economic growth stable, the PBOC is also tasked with managing inflation and financial stability.

Ming also noted that the report dropped the phrase “will avoid excess liquidity flooding the economy,” which was mentioned in the previous report for the fourth quarter of 2019. The omission signals “further expansion of monetary policy,” and it shows the policy has shifted toward other more important goals, he said.

The central bank warned of greater challenges in both the domestic and global economy, saying the virus has brought “unprecedented blows” to China and pushed the world onto “a recession path.” While stronger policies are pledged to deal with these challenges, the bank did not state explicitly what measures will come next.

In the policy outlook section, the PBOC gives greater play to its targeted relending tool that had committed 1.8 trillion yuan ($254 billion) of credit to virus-hit sectors such as exporters and small businesses. It didn’t commit to broader easing measures such as further cuts to banks’ reserve ratios or interest rates on its funding tools.

What Bloomberg’s Economists Say...

“The People’s Bank of China looks poised to lower interest rates at a faster pace to shield the economy from the global slump. Its latest monetary policy report showed a clearer awareness of the impact of the downturn in external demand and signaled an intent to step up monetary support for the economy.”

Chang Shu & David Qu, Bloomberg Economics

For the full note click here

The PBOC confirmed it had lowered the interest rates for its emergency funding facility, the so-called the Standing Lending Facility, by 30 basis points on April 10. Bloomberg reported last month that the rate would likely be lowered. The central bank doesn’t usually immediately release decisions on that rate.

The report said the pandemic may last longer and have greater negative impacts than people have anticipated, and the extra easing policies adopted in other countries could spill over to China. It said more attention should be paid to China’s balance of payments.

Read more: China Seen Adding Funds in May to Plug $250 Billion Cash Hole

The possibility of cutting the benchmark deposit rate, a tool the markets have been looking forward to to improve banks’ profit and their ability to lend, isn’t mentioned in the report, signaling the lack of urgency in such a move, Zhang Yu, Beijing-based chief macro analyst at Huachuang Securities Co., wrote in a note, while adding the rate may play a role in offsetting a fall in external demand and other uncertainties in the future.

“New cases in developed countries seemed to have passed the turning point, while the number in developing countries rises. The outlook of virus control remains uncertain,” she said. “Monetary policy will keep a wait-and-see pace. It shouldn’t take rash actions before the situation of external demand becomes clear, but the loosening stance isn’t changed.”

©2020 Bloomberg L.P.

With assistance from Bloomberg