China central bank shifts focus to growth; more easing expected

Beijing

THE expected move over the weekend to cut the amount of cash Chinese banks have to hold in reserves came as the trade war with the US intensified, and analysts say Beijing's focus will be on furthering support for growth in the coming months.

Last Sunday, the People's Bank of China announced that it would cut banks' reserve requirement ratios (RRRs).

The move, to take effect on Oct 15, is aimed at lowering financing costs for companies and spurring growth. The latest cut, which brings the total reduction in RRR for the year to 250 basis points, is expected to free up 750 billion yuan (S$152.6 billion).

The ratios are now at the lows reached in the aftermath of the global financial crisis in 2009.

The move - the fourth since the beginning of the year - came as businesses started feeling the effects of the American tariffs on Chinese imports and an ongoing deleveraging campaign aimed at cleaning up companies' bad debts.

Darren Tay, the Asia analyst at Fitch Solutions, said: "The latest cut much needed liquidity to businesses amid a continued crackdown on shadow financing, especially against peer-to-peer lending platforms."

Monthly economic data has pointed to an economic slowdown with investment growth at a new low in August. Exports underperformed in the first half; export orders fell at their fastest pace in September, a manufacturing survey showed last week.

Analysts expect downward pressures to persist on the economy, and a further depreciation of the yuan as investors diversify risks.

The Chinese currency has lost 10 per cent to the US dollar since the beginning of the year.

A recent report by JP Morgan now estimates that the Trump administration is likely to proceed with tariffs on all Chinese goods sent to the US by the end of next year, which would knock off up to 1 percentage point off growth unless Beijing steps in further.

The government is increasingly worried over the economic impact of the trade tensions with the US, which shows no signs of easing.

Last week, US Vice-President Mark Pence accused China of "malign" efforts to undermine President Donald Trump ahead of next month's congressional elections.

US Secretary of State Mark Pompeo was in Beijing on Monday, but did not meet with Chinese President Xi Jinping, as he did during his last visit to the Chinese capital.

Chinese officials have repeatedly said over the past month they would support growth and investment.

Premier Li Keqiang vowed to further cut taxes, administrative fees and red tape in an effort to support the real economy, said a government statement posted last Friday.

However, there have been no signs Beijing will open the taps as it did in 2009, which led to ballooning debts for companies and local governments.

"The move is part of policy makers' defensive easing package, in view of headwinds on broad credit growth and more visible activity moderation in September," said Robin Xing, chief China economist at Morgan Stanley.

The central bank said on Sunday it would continue to take necessary measures to stabilise market expectations, while maintaining a prudent and neutral monetary policy.

It said it would not create depreciation pressure on the yuan, and that it would keep the foreign exchange markets stable.

In the short-term, analysts expect China to shift its focus to supporting growth, juggling this with its longer-term commitments of deleveraging and cleaning up companies' balance sheets and rebalancing the economy.

On the ground, they expect more provincial governments to implement stimulus measures.

"To keep the economy on the path of soft landing amid persistent trade tensions, we think more easing measures are needed to foster a modest rebound in credit growth," said Mr Xing.

Fitch's Mr Yek added: "This latest move to further loosen monetary policy was in line with our expectations, and we expect looser policy still over the coming months. In our view, the economy still faces significant downside pressure over the coming months and the need to support the economy will likely persist."

Analysts say reserve ratio rates will be cut further, with the next cut expected after January 2019. They also expect an interest rate cut and more tax rebates for companies.

China has already announced it will increase export tax rebates from Nov 1 and quicken export tax rebate payments.

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