China May Unleash Easing Tools Faster Than Expected, BNP Says

(Bloomberg) -- Beijing might unleash more easing measures and at a faster pace than the market expects, and the measures will likely be targeted, according to BNP Paribas.

China’s leadership is determined to continue its debt-reduction campaign even at the cost of more economic pain, which is reflected in the preference for targeted easing rather than a broader loosening, according to Chi Lo, senior economist for greater China at BNP Paribas Asset Management.

The world’s second-largest economy is being hammered by a brewing trade war, slowing growth, a bear equity market and a slump in the yuan. Investors are looking to a meeting of top leadership later this month to help decipher how policy makers will respond.

In the coming months, authorities in Beijing may take the following measures to manage sentiment, according to Lo:

  • More selective liquidity injections through the People Bank of China’s various funding tools such as the Medium-Term Lending Facility, and cuts in the Required Reserve Ratio, the amount of capital banks need to stock at the central bank. Cuts in the benchmark interest rate could come as the very last resort, as that could undermine the anti-leverage policy.
  • Increase in fiscal spending, especially on infrastructure.
  • A relaxing of the scrutiny of Public Private Partnership projects and other investment proposals to speed up investment.
  • Tax cuts.
  • Slowdown in the pace of regulatory tightening on non-bank financial institutions so the pressure on shadow financing will ease.
  • Approval of more local government bond issuance to help fund investment projects. The second half of this year is expected to see an increase in issuance.

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