China’s central bank wants the total flow of credit to rise by almost a fifth this year, as part of efforts to push the economy out of the coronavirus-induced slump.
That’s to be achieved through record special-purpose bond issuance as well as a 19% increase in bank loans, according to People’s Bank of China governor Yi Gang.
In all, total social financing flow should rise to at least 30tn yuan ($4.2tn) this year, Yi said during a speech in Shanghai yesterday.
That would represent a 17% expansion from 2019’s 25.6tn yuan in new credit including government bond issuance, according to Bloomberg calculations.
Even so, the depth of China’s first-quarter contraction and the chance that the virus shutdowns will return in earnest imply that the increase may not be enough.
The expansion is “very modest considering the need of stimulus for recovery after the damage from Covid-19,” said Iris Pang, an economist at ING Bank NV in Hong Kong. “It is like a credit growth after a small crisis. We are now in a deep recession.”
China’s top bank regulator, Guo Shuqing, also reiterated yesterday that officials “won’t flood” the economy with cash.
Nevertheless, Chinese equities erased losses ysterday after the comments on optimism over the stimulus outlook.
Yi repeated an earlier statement from Premier Li Keqiang that banks will need to sacrifice 1.5tn yuan in profits this year.
That will happen in three ways – lowering interest rates, using monetary policy tools to directly finance the real economy, and reducing banks’ charges, Yi said.
“In the second half of the year, we expect monetary policy to keep ensuring reasonable and ample liquidity,” Yi said. “We need to pay attention to the side effects of the policies, keep the total amount appropriate and consider in advance good timing for an exit from the policy tools.”
The comments came after China’s cabinet signalled that the central bank will act to make more liquidity available to banks so they can lend more, including by cutting the amount of money they have to keep in reserve.
China will reduce the reserve requirement ratio and use its relending policy to keep liquidity ample, state television reported Wednesday, citing a State Council meeting chaired by Premier Li.
Sheng Songcheng, a former PBoC official and an influential commentator on policy, said on the sidelines of the Lujiazui Forum in Shanghai yesterday that he doesn’t think the central bank should take the further step of cutting the rate that anchors what banks pay depositors for their savings.
That had been floated by a state-owned newspaper earlier this week.
“China is in de-facto negative rates as the 1-year deposit rate is lower than inflation,” he said.
Cutting that would hurt the interests of ordinary people, and it’s almost impossible to spur consumption through that route, he said. Overall, markets have not responded positively to the PBoC’s recent policy signals.
While the country’s central bank injected short-term funds into the financial system yesterday and cut the cost on the loans, the moves were insufficient to calm a bond market that’s getting increasingly concerned about liquidity.
Pedestrians wearing protective masks walk past the People’s Bank of China building in Beijing. u201cThe PBoC needs to start using some policies to guide market expectations and to show investors that the easing cycle will be in place for the coming six months,u201d said Larry Hu, head of China economics at Macquarie Securities.
