- The People's Bank of China lowers seven-day reverse repurchase rate from 2% to 1.9%, marking the first cut in nine months amidst a slowing economy.
- Wall Street economists predict the start of numerous forthcoming monetary easements as China strives to stimulate its economy, with all eyes on the July Politburo meeting in Beijing.
- The new bank loans in May rose by 11.4%, falling short of estimates, thus bolstering the case for more economic stimulus.
This week, a significant monetary policy adjustment was made by the central bank in Beijing, an event that economists perceive as the beginning of a new financial era, given the sluggish recovery from the Covid-19 pandemic in China.
Earlier in the week, the People’s Bank of China (PBOC) made an unprecedented move, lowering its seven-day reverse repurchase rate from 2% to 1.9%. This first-rate reduction in nine months comes amidst a slowing economy and less-than-promising data. Renowned economists from Wall Street foresee this as the initial step of a series of monetary easements to follow. "This reduction, the first since August 2022, signifies a shift in policy from a wait-and-see approach to proactive easing," observed a team of Citi economists, led by Xiangrong Yu.
The team further suggests that this is just the start, and we should expect to see more of such small-step measures in the coming weeks, especially as all eyes turn to the July Politburo meeting in Beijing for potential major policies. The recent move by the central bank resulted in an increase in China's sovereign bonds' price and a drop in the Chinese yuan to its lowest level since November.
Economists are observing weakening economic indicators in China, and this includes credit data, signaling that a stimulus may be underway. New bank loans in May increased by 11.4% to 1.36 trillion yuan ($190 billion), but this fell short of Reuters' poll estimates. This shortfall, coupled with declining industrial profits and exports, strengthens the case for more economic stimulus.
Barclays economists anticipate that China will implement a rate cut every quarter until early 2024. Goldman Sachs shares similar expectations, predicting cuts to medium-term lending facility rates and loan prime rates. Both these metrics heavily influence borrowing costs across banks, businesses, and individuals in China.
However, not all financial experts agree that these steps will suffice. Vishnu Varathan, Mizuho Bank's Head of Economics and Strategy for Asia, is of the opinion that a more comprehensive plan might be necessary, despite the associated risk of disrupting economic stability.
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