Key View
- We at Fitch Solutions expect the Chinese authorities to maintain loose monetary policy through 2022 in order to support economic activity, after the People’s Bank of China cut the reserve requirement ratio by 25bps for all banks on April 15.
- We now see diminishing scope for further easing given that the increasing divergence in monetary policy between China and the US, which is normalising monetary policy, could lead to large outflows of capital from China.
- We also expect macroprudential measures for the real estate sector to be eased further and loan moratoriums and other forms of regulatory forbearance to be implemented in order to maintain short-term financial stability.
The People’s Bank of China (PBoC) cut the reserve requirement ratio (RRR) for all banks by 25bps on April 15, and we at Fitch Solutions expect monetary policy to remain loose through 2022. Chinese authorities are likely to encourage credit growth to support economic activity, which has come under strong headwinds from the outbreak of Covid-19. In addition to the traditional monetary policy tools such as the RRR and the medium-term lending facility (MLF) rate, we expect the PBoC to also implement loan moratoriums or other forms of regulatory forbearance. This is particularly important for mortgages, in order to ensure that the more challenging economic conditions do not result in financial contagion in the real estate sector. Furthermore, scope for more conventional monetary easing through the RRR and MLF is diminishing in our view, especially as the US will continue normalising monetary policy over the remainder of 2022.
Accommodative Stance To Remain Through 2022
China – Reserve Requirement Ratio, %
Source: Wind, Fitch Solutions
With the latest cut, scheduled to take effect from April 25, the RRR for large banks and smaller banks is now at 11.25% and 8.25%, respectively. The cut was also noteworthy for its relatively small size, as previous moves in the RRR have tended to take place in 50bps or 100bps chunks and this is the first time a 25bps move has been made. According to the PBoC, the cut will release another CNY530bn (around 0.4% of GDP) in liquidity for the banking sector.
Some Capital Outflows Since January
China – Bonds Held By Foreign Investors, CNYbn
Source: Bloomberg, Fitch Solutions
While we believe further easing is likely, we expect this to be measured and targeted. Indeed, the smaller 25bps cut to the RRR indicates two key considerations on the part of the PBoC in our view. First, the space to cut the RRR has been diminishing, with the RRR for smaller banks already at the lowest level since July 2006, and further cuts could begin to risk the financial stability of this segment of the banking sector. Second, China is increasingly constrained in its easing efforts by the generally normalising monetary policy around the world, especially in the US, where we see a minimum of another 100bps worth of interest hikes. Running too divergent a monetary policy relative to the US could increase downside volatility in the Chinese yuan as foreign investors see diminishing returns in China. As the chart above shows, bonds held by foreign investors fell by 4.4% to CNY3,568bn in March, from CNY3,733bn in January.
Rising Inflation Limits Space For Further Easing
China – Consumer Price Inflation, % chg y-o-y
Source: Wind, Fitch Solutions
Furthermore, while inflation is still relatively benign and below the government’s 3.0% target at 1.5% y-o-y in March, we expect price pressures to pick up over the course of the year as higher commodity prices and supply chain disruptions feed through, while high base effects for pork prices continue to fade. This view is reflected in our 2.7% y-o-y average inflation forecast for 2022 and higher inflation will also constrain the PBoC’s ability to ease further.
Banking Sector Heavily Exposed To Real Estate
China – Major FI Loans, % of Total FI Loans
Source: Wind, Fitch Solutions
Finally, we expect the Chinese authorities to also implement loan moratoriums and other forms of regulatory forbearance, as well as a further easing of macroprudential measures for the real estate sector, in order to ensure short-term financial stability amid the slowing economy. Indeed, we have revised our 2022 growth forecast down to 4.5% from 5.2% previously, to reflect the headwinds presented by the strict lockdowns imposed in 45 of China’s cities (as of the time of writing on April 19). In addition to SMEs in general, the real estate sector is highly vulnerable to the impact of the lockdowns.
