China embarks on credit easing as economic fatigue worsens

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The weakening of traditional economies such as housing and consumption has slowed growth in the world’s second-largest economy since early 2021. Exports, the last major driver of growth, are also showing signs of fatigue.

More recently, some economists say the widespread disruption and severe blockade of activity from China’s largest COVID-19 outbreak since 2020 has increased the likelihood of a recession.

On Wednesday, the State Council, or the Cabinet, said after the meeting that monetary policy tools, including the reduction of reserve requirements (RRR) required for banks, should be used in a timely manner.

During the last two rounds of RRR reductions in 2021, each announcement of mitigation was made 2-3 days after being announced by the State Council.

“We look forward to the People’s Bank of China announcing a 50 basis point RRR cut and potentially a cut in interest rates over the next few days,” Goldman Sachs said in a statement Thursday.

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Currently, most private citizens expect an RRR reduction of 50 basis points (bp). This frees over 1 trillion yuan ($ 157 billion) of long-term funding that banks can use to prepare.

According to comments from the state-owned Securities Times, April 15th will be a hot day.

On Monday, China will release March data on industrial production and retail sales, which are expected to reflect the impact of COVID restrictions, and gross domestic product (GDP) for the first quarter.

However, some analysts say RRR as consumers remain cautious in a highly uncertain economy due to lack of credit demand, while factories and businesses are suspended. I doubt the effectiveness of the reduction.[nL2N2VZ04K[nL2N2VZ04K][nL2N2VZ04K[nL2N2VZ04K

According to Nomura, COVID-related lockdowns and logistics disruptions have severely disrupted rate cuts and traditional RRR transmission routes.

“If households struggle to store food and private companies prioritize survival over expansion, credit demand is weak,” Nomura’s analyst said in a statement.

“With so many blockades, road barricades and housing restrictions, the biggest concern is primarily on the supply side, and the simple act of adding loan funds and slightly lowering interest rate debtors is the final demand. It is unlikely to stimulate effectively. “

According to Nomura, China is “at increased risk of recession” and currently 45 cities are taking full or partial closures, which is 26.4% of the country’s population, GDP. It is equivalent to 40.3%.

We expect to reduce 10 basis points each in a one-year medium-term lending facility (MLF), one-year and five-year prime lending rates (LPR), and a seven-day reverse repo short-term.

The next MLF will arrive on Friday.

Since January, China has not changed its benchmark one-year LPR to 3.70% and has stabilized its five-year LPR at 4.60%.

“But monetary policy is not a panacea for all problems,” the Securities Times commentary said.

“Unlocking supply and industry chains, allowing businesses to receive orders and earn income is the only way to improve real economy cash flow and achieve a natural recovery. ”

($ 1 = 6.3663 RMB Chinese)