Targeted steps to sustain economic growth likely in third quarter of this year Monetary authorities in China are slowing down the pace of policy
easing amid signs of a strong economic recovery with more targeted
measures likely to be rolled out during the third quarter of this year
to sustain economic growth. The nation's benchmark lending rate, the loan prime rate (LPR), has
remained unchanged for three consecutive months. The People's Bank of
China, the central bank, maintained the one-year LPR at 3.85 percent and
the five-year or longer tenure LPR, which pertains to mortgage loan
rates, at 4.65 percent on Monday. The last time the central bank effected a rate cut was on April 20,
when it cut the one-year LPR by 20 basis points and the longer term rate
by 10 basis points, at a time when the economy had started to recover
from the novel coronavirus epidemic. Unlike its global peers, the PBOC did not have to make sweeping
monetary changes as the world's second-largest economy saw a 3.2-percent
year-on-year expansion in GDP versus a 6.8-percent decline in the first
three months and deep contractions in some developed economies. Instead of cutting the major interest rates or reducing the reserve
requirement ratio, the bank reserves that must be maintained with the
central bank, the PBOC opted for open market operations and used the
medium-term lending facility to maintain liquidity at ample levels, said
experts. "In the second half of this year, the monetary policy may shift to a
more normalized status, focusing on targeted easing to support
manufacturing and smaller businesses," said Wen Bin, chief researcher at
China Minsheng Bank. The growth in property price inflation, especially in some tier-2
cities, has also slowed the monetary policy easing to some extent. Local
authorities in cities like Shenzhen and Ningbo have maintained strict
control on property sales to keep prices in check and prevent potential
property bubbles, said the experts. Although the upturn in China's economy is likely to continue in the
second half of the year also, some economists expect sectors like retail
sales and exports to still remain weak. Supportive monetary measures are also needed to lower interest rates
in the interbank market and ease liquidity stress in small and
medium-sized banks, according to Zhang Bin, a senior researcher of the
China Finance 40 Forum and a scholar at the Institute of World Economics
and Politics under the Chinese Academy of Social Sciences. The coordination of monetary and fiscal policies should be
strengthened, and the efficiency of countercyclical policies should be
improved to deal with the COVID-19 effect, said Zhang. "Fiscal policy
should take a more significant role to support spending, which can also
help governments at all levels to inject capital into small and
medium-sized banks by issuing bonds or using their own funds to
supplement capital and improve the ability to support the real economy." Cutting the interest rates and RRR will be the possible measures that
the PBOC may use in the second half to guide down the overall social
financing costs, said Wen from China Minsheng Bank. Besides, more
structural tools will be used to direct the floating funds to the
weakest sectors, said Wen. PBOC officials had earlier this month hinted that they would phase
out the special measures deployed to mitigate COVID-19 shocks and
stimulate the economy at an appropriate time and the interest rate level
would match the potential economic growth rate while being in line with
the recovery speed. The PBOC injected 400 billion yuan ($57 billion) of funds under the
MLF scheme for banks last week, at a rate of 2.95 percent, which has
been unchanged since April 15. This month, about 690 billion yuan of the
MLF loans are due to expire. The market expects the PBOC to adopt
additional measures to roll over the loans.
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