The People’s Bank of China surprised investors on Wednesday by revealing a bigger-than-expected RRR cut weeks in advance, providing markets with a much-needed boost. Economists see the central bank following up that move by steering credit into select areas, along with a handful of trims to the amount of cash banks must hold in reserve and modest policy-rate cuts.

“RRR cuts will likely be more infrequent going forward, and only used as a signal tool when markets are performing particularly poorly,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “Structural tools will play an even bigger role.”

The PBOC already increased funding via such tools by 7% last quarter from the previous period, reaching 7.5 trillion yuan ($1 trillion) overall, data published by the central bank Friday showed. 

Governor Pan Gongsheng’s decision to personally announce the RRR cut, instead of waiting for state agencies to publicize it, came after a similar move by Premier Li Qiang. Earlier this month, China’s No. 2 official took the unusual step of revealing China’s GDP figure for 2023 before the statistics bureau. 

Both moves show the emphasis top Communist Party figures are putting on boosting confidence. That reflects the urgency facing President Xi Jinping’s government to respond to calls for more aggressive stimulus as the economy grapples with a real estate slump, lingering deflation, shattered confidence and a $6 trillion stock market rout. 

Pan stressed policymakers will have more room to take action this year, citing signs of forthcoming easing by the Federal Reserve as one factor. The central bank chief also mapped out ways to deliver financial support to key sectors.

The PBOC will set up a new credit market department to promote financing to technology, green and other sectors, he said. It’s also cutting the interest rate on more than 2 trillion yuan ($279 billion) of low-cost funds for banks — a move intended to encourage more lending to agriculture and small firms.

“Setting up a new department is a signal that structural tools will guide funds into the real economy and key sectors that are given priorities to grow,” Ding said.

The PBOC’s increased use of such mechanisms in recent months was driven by a rise in relending tools to encourage loans for specific sectors, as well as the Pledged Supplemental Lending funds for housing projects.

Aside from the PSL, the PBOC’s structural tools have so far done little to aid the property market. The latest data showed that several property-related, low-cost facilities set up in the past two years have hardly been used. They include funds for helping the completion of unfinished apartments and for rental housing projects.

That remains a key challenge for the economy. The real estate industry “has an important impact on the national economy and is closely related to the lives of the people,” Xiao Yuanqi, deputy head of the National Administration of Financial Regulation, said during a press briefing this week. “The financial industry has an unshirkable responsibility and must vigorously support it.”

The PBOC has increasingly leaned on tools that steer credit to specific sectors since 2020, when the pandemic hit economic growth. That marks a departure from its former strategy of moving toward influencing borrowing costs via adjusting its policy rates, and largely letting investors determine where the money would go.

That kind of broad easing may be seen by the PBOC as carrying risk, said Larry Hu, head of China economics at Macquarie Group Ltd. Such policies allow money to flow into troubled areas, such as the property sector and indebted local governments, he added.

Pan’s continuation of that focus on structural tools indicates the central bank wants to make sure money is going to the areas it thinks will benefit the economy. The trade off is that price signals won’t play as large a role here.

What Bloomberg Economics Says … 

“There’s little doubt the People’s Bank of China will deliver more stimulus on top of the latest reduction in bank reserve requirements — Governor Pan Gongsheng made that clear when he laid out the PBOC’s price objectives, the economy’s challenges, and the central bank’s room for maneuver on Wednesday. We now expect more easing than we did in November. The extra effort is likely to take the form of deeper reductions in the RRR.”

— Chang Shu and David Qu, economists

Ding from Standard Chartered and others have said the PBOC may introduce more relending tools to ensure credit flows to channels in line with the ruling party’s broader objectives. The central bank has listed small businesses, the digital economy and elderly care as other favored sectors. 

There’s also potential for the PBOC to dip further into its PSL funds — a controversial tool that involves injecting low-cost funds into policy banks to support housing and infrastructure projects. Some economists have called this a form of “Chinese-style quantitative easing.”

In China, “structural tools indeed account for a larger portion than in advanced economies,” Macquarie’s Hu said. “It’s a monetary policy framework with Chinese characteristics.”

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Published: 26 Jan 2024, 09:16 PM IST