Dribs and drabs. The PBoC is easing in dribs and drabs.
Once China cut rates on short-term repo last week, a cut to the key one-year MLF rate was assured. MLF cuts needn’t necessarily, but generally do, presage reductions to one or both loan prime rates.
The LPRs are banks’ benchmark lending rates — the rates charged to well-qualified borrowers. In August of 2019, the PBoC introduced reforms aimed at deemphasizing the “old” benchmark lending rate in favor of the one-year LPR and a new five-year tenor linked to mortgages. LPR quotes reference the MLF rate, which means the PBoC can guide the LPRs lower.
That’s all just as boring as it sounds, until you remember we’re talking about the fate of the global economy. Eventually, the US labor market will cool, prompting otherwise incorrigible American consumers to dial back spending. When that happens, and assuming US business investment remains subdued, the world will need the Chinese economy to take the baton. But all the evidence suggests China’s recovery is no recovery at all. That’s why analysts and economists are so keen to see something like conviction out of Chinese policymakers when it comes to stimulus. Alas, dribs and drabs.
Apparently, markets expected something more creative than symmetrical 10bps cuts to both LPR tenors on Tuesday. On two occasions last year, the five-year LPR was lowered by 15bps in a bid to bolster the flagging property market. You can see those outsized reductions in the figure below. Investors seemed disappointed that banks didn’t endeavor to send a similar message about real estate on Tuesday by lowering the five-year rate more than the one-year.
As one economist dryly noted, it’s the whole “housing is for living, not for speculation” mantra. The Party is extremely wary of sending the wrong signal about the property market.
The State Council is widely expected to unveil a raft of new measures aimed at supporting the economy, but as discussed in “China Stimulus Week,” markets have seen this movie before. In all likelihood, the Party’s efforts will underwhelm investors, and the longer Beijing waits to provide details, the higher that risk is.
Not that Xi cares what investors think. “Stimulus is for stability, not for gambling.” Or something. As ever, there’s a disconnect between horizons. Investors expect results now. Mia is dying, and markets want a Vincent Vega-style solution. Ostensibly anyway, Xi is focused on the longer run. Policy measures must be carefully crafted and considered, and can’t be tailored to appease impatient markets.
Hong Kong-listed Chinese shares trundled lower Tuesday. It’s been a very tough 2023 relatively speaking for Chinese equities.
“We think policymakers will provide a package of old-fashioned stimulus measures, but the size is unlikely to be as substantial as previously, because even they realize the debt-driven model is reaching its limit,” SocGen’s Wei Yao and Michelle Lam remarked. “That said, the ‘less substantial’ amount could still reach CNY1-2 trillion of additional funding,” they added. “The funding source is likely to be PBoC’s relending or policy banks, but the better choice would be special CGB issuance, which has a higher hurdle to clear but is not entirely unlikely.”
Whatever Beijing intends to do, they should probably do it soon, lest markets should run completely out of patience. Rate cuts without a fiscal package are all but useless given lackluster credit demand.
One analyst in Paris (an Alexandre Baradez at IG Markets) summed it up. “At this stage we can see that the first measures taken by China don’t seem to be reassuring markets,” he said.
