China was the only major economy that managed to grow in 2020, a bitter pill for the rest of the world considering the pandemic began on Chinese soil.
Relative economic resiliency allowed the PBoC to maintain what counted as a “neutral” policy stance following initial efforts to cushion the blow from the epidemic and associated lockdowns.
More recently, Beijing attempted to reanimate a long-running, on-again/off-again deleveraging campaign via a hodgepodge of measures and decrees, including a kind of pseudo-mandate that banks maintain lending at around the same level versus 2020. If banks adhere to that guidance, the pace of credit growth would slow to a 15-year nadir this year. In May, the country’s credit impulse turned negative on some measures.
At various intervals, markets worried the dwindling Chinese credit impulse and attendant “prudence” from the PBoC (they love that word in Beijing) might undercut or otherwise offset accommodation abroad, even as it could defuse myriad manifestations of speculative excess in China.
But, over the last 24 hours, chatter of a dovish turn from the PBoC was pervasive after the State Council tipped an RRR cut “at the proper time” to help shore up the world’s second-largest economy, where growth appears to be decelerating. Benchmark yields dropped below 3% Thursday as traders speculated on the move (figure below).
“A potential easing could provide the bond market with much-needed liquidity to absorb the flood of local government debt sales as a swathe of policy loans mature in the second half of the year,” Bloomberg noted.
This is effectively the reverse of what developed market central banks are currently attempting to do. That is: China is looking to ease (at the margins, anyway) in order to bolster a recovery seen flagging, while DM policymakers are taking steps down the road to normalization as advanced economies stabilize.
China held off on “bazooka”-type easing during the pandemic, which means the PBoC has plenty of scope to support the economy should it start to falter. DM central banks, on the other hand, threw everything they had at the crisis and are now effectively trying to reload (i.e., tighten) while the window is open.
“The dovish pivot happened earlier than we thought, even though we’ve always expected Chinese policymakers to ease in H2,” SocGen’s Wei Yao and Michelle Lam remarked.
There’s considerable debate about “what kind” of RRR cut this will be, with a (seeming) consensus forming around a targeted approach.
“RRR cuts won’t help if the problem is a lack of confidence and too much debt,” Rabobank’s Michael Every said Thursday. Jefferies’ Shujin Chen said a targeted cut would be “good for sentiment” but probably wouldn’t do much to alleviate the slowdown in credit, given passive fiscal policy and efforts to curb property speculation. For Hangzhou Xiyan Asset Management’s Shi Junbo, an RRR cut aimed at small businesses wouldn’t mean much for Chinese equities. “There may be some sentiment-driven gains, but I doubt they would have legs,” Shi said. One major Wall Street bank suggested the State Council’s easing nod hints at disappointing Q2 GDP growth, but helps clarify Beijing’s preference for monetary policy going into the back-half of the year, which could be a risk-on cue for markets.
I suppose what I’d note is that the abrupt dovish turn from Beijing may have accidentally exacerbated global growth fears at a delicate juncture. Ostensibly, easing rumblings out of China are bullish, but considering the prevailing mood, it’s somewhat disconcerting that Beijing seems to believe the domestic recovery is in jeopardy.
“Note it wasn’t the PBoC saying this, underlining how monetary policy in China differs from the West (for now),” Rabobank’s Every dryly noted.
But the writing is on the wall. “The PBoC often – but not always – goes where the State Council points, so we should be prepared for an imminent RRR cut, especially if growth data continues to disappoint,” SocGen’s Lam said.
The table (above) gives you a sense of how this dance usually plays out (or not).
Lam went on to declare “the window for the PBoC to raise rates formally and thoroughly closed.” The question now, she said, is when the “proper easing” will start in China.
