Fed’s Move Puts Global Stimulus Baton Back in China’s Hands
China is expected to ramp up stimulus with interest rate cuts, cash injections and more support for struggling companies.
(Bloomberg) -- The biggest shock to the world economy since the financial crisis is stoking expectations that China will ramp up stimulus with interest rate cuts, cash injections and more support for struggling companies.
Until now policy makers in Beijing have focused on containing the virus and avoiding the kind of all-out splurge stimulus that marked previous economic crises. Record levels of debt have kept the policy response disciplined along with the reality that rate cuts don’t fix supply chains.
There’s also been an urgent push to get banks lending to smaller and medium sized companies.
Yet the Federal Reserve’s emergency rate cut gives the People’s Bank of China a window to loosen without triggering capital outflows or a weakened yuan.
Their options include trimming requirements on the amount of cash banks need to hold as reserves.
The PBOC will likely continue to trim the interest rate of one-year medium-term loans in March, lowering it by another 10 basis points, according to 28 analysts and traders in a Bloomberg survey conducted Wednesday. That would be after a cut in the rate of the same size last month, and could then lead to a 10 basis point reduction in the de facto benchmark loan prime rate, they said.
Officials have also said they’re reviewing the benchmark deposit rate, a move that could lower banks’ funding costs. On the fiscal side, a bigger deficit and more bond sales are likely to shore up infrastructure spending.
“Long gone are the days where changes in the Fed policy stance alone could steer global growth,” said Frederic Neumann, Hong Kong-based co-head of Asian economics research at HSBC Holdings Plc. “With challenges like the coronavirus outbreak it requires both China and the U.S. to deliver a punchy stimulus.”
Signs that factories and workers are returning to full production and consumers are spending again as the virus infection rates stabilize may mean the worst is over in China.
What Bloomberg’s Economists Say
The PBOC is now focused on increasing support for the virus-stricken economy. The PBOC is clearly going in the same direction as the Fed -- and we expect it to guide market rates down in the days ahead.
David Qu, Economist
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Yet it’s also clear that if China wants to meet an expected growth target for this year of around 6%, more stimulus will be needed. Even a lower target will still require a mix of tax cuts, spending and lower rates.
While there are signs that progress is being made on getting the nation back to work, the process is slow and may take many weeks yet to complete.
Other economists continue to lower their China growth forecasts. The Paris-based OECD this week slashed its global outlook and warned a recession is possible.
While total debt has soared over the past decade, central government borrowing remains low and the PBOC has probably more room for maneuver than any other major central bank.
As well as trying to help companies across the nation, the central bank and regulators are attempting to aid businesses in Hubei, where all economic activity is still basically stopped as many people are not allowed to leave their houses. Banks were told to lend more to firms in Hubei and other affected regions, reduce the cost of lending, and refrain from withdrawing loans, especially from small firms.
The PBOC has also kept liquidity plentiful and lowered interest rates of its medium-term loans to lift market sentiment.
Not Enough
Local authorities have been allowed to sell about 1.8 trillion yuan of special bonds to expedite infrastructure investment. Targeted cuts to taxation and social security premiums were offered to virus-hit companies to avoid massive layoffs.
Some worry that may not be enough.
“The problem with all these is that they cannot control the virus,” said Hao Hong, chief strategist at Bocom International. “And we don’t know whether people going back to work en-masse could make the virus relapse, even though it’s largely brought under control in China.”
Ding Shuang, chief Greater China and North Asia economist at Standard Chartered Plc said near term measures may include an easing up on the war on debt by allowing credit to expand faster than nominal growth or by lowering money market interest rates and reserve ratio requirements for banks.
Given China accounts for over 30% of world growth, any extra stimulus will be felt globally too.
“The size of China’s economy in today’s world means it will always have an impact,” said Howie Lee, an economist at OCBC Bank in Singapore.
--With assistance from Tian Chen, Xize Kang, Heng Xie, Jing Zhao, Yuling Yang, Wenjin Lv, Shuqin Ding, Helen Sun and Ling Zeng.
To contact the reporters on this story: Enda Curran in hong kong at ecurran8@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger
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