©Reuters. FILE PHOTO: Paramilitary police officers stand guard outside the headquarters of the People’s Bank of China, the Central Bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File Photo
By Kevin Yao
BEIJING (Reuters) – China’s $17 trillion economy is heading for one of its worst results this year in nearly half a century, but the central bank has limited options in its arsenal of policy support as it seeks to avoid fuel the flight of capital.
Therefore, according to political sources and analysts, the People’s Bank of China (PBOC) is poised to step up targeted support for struggling sectors and ramp up the nearly $800 billion in loans it has already lent through its structural instruments.
The PBOC, which is trying to prop up an economy weakened by COVID-19 restrictions and a housing crisis, is expected to avoid aggressive stimulus that could stoke inflationary pressures and risk outflows from China, which would weaken the yuan, they said.
The PBOC’s room for maneuver has been limited by a global tightening wave led by the US Federal Reserve’s aggressive rate hikes to tame inflation, although Fed Chair Jerome Powell has indicated their pace is slowing.
Since 2020, when the world’s second-largest economy was first rocked by the coronavirus, the PBOC has expanded its arsenal of structural policy tools, including reending and rediscounting facilities and other low-cost borrowing.
It has offered cheap loans to support small businesses, transport and logistics — sectors hardest hit by COVID — and sectors that align with Beijing’s long-term development goals, such as tech innovation, elderly care and carbon reduction.
“The central bank is likely to expand the scope of structural policy tools and increase the use of such tools,” said a person involved in policy discussions, who spoke on condition of anonymity.
“We will not resort to flood-like stimuli but will make policies more targeted and efficient to ensure adequate and sufficient liquidity.”
The PBOC did not respond to Reuters’ request for comment.
Outstanding loans issued through structural instruments totaled nearly 5.6 trillion yuan ($781.64 billion) at the end of September, central bank data showed.
The PBOC pledged 200 billion yuan in special loans to bail out the real estate sector last month and 154.3 billion yuan in loans to political banks in October through its pledged Supplemental Credit Facility (PSL) to finance infrastructure projects.
The central bank announced last week that it would cut banks’ reserve requirement ratio (RRR) for the second time this year, freeing up about 500 billion yuan in long-term liquidity, narrowing the scope for using the traditional tool. The average reserve ratio was reduced to 7.8% from 14.9% in 2018.
“What I expect is that the PBOC will engage in some form of unconventional monetary policy to increase the efficiency of this RRR cut,” said Iris Pang, chief economist for Greater China at ING, in a note.
To direct more lending to specific sectors, the central bank could increase its small business loan back rate, boost lending for unfinished housing projects and guide commercial banks to accelerate lending growth, Pang said.
All eyes are on the closed Central Economic Work Conference in December, when Chinese leaders are expected to set the policy course for the economy in 2023.
Chinese government advisers have told Reuters that they would recommend economic growth targets of between 4.5% and 5.5% for 2023. A central bank adviser said last month that China should set a growth target of no less than 5% for next year.
Leaders are expected to endorse a target at the December meeting, although it will not be publicly announced until China’s annual parliamentary session, which usually takes place in March.
Beijing is likely to double its infrastructure boost in 2023 and issue more debt to fund large projects while supporting the PBOC with modest easing, political sources said.
“We face some policy constraints (from the Fed’s moves), there’s no doubt about that,” Yu Yongding, an influential government economist who previously advised the central bank, told Reuters.
“But there is scope for monetary easing as long as inflation does not pick up. The biggest danger for China’s economy is that the growth rate is too slow.”
China is on track to miss the official growth target of “around” 5.5% this year, with economists forecasting growth of around 3%. Excluding the 2.2% expansion in 2020, it would be the weakest growth since 1976, the final year of the decades-long Cultural Revolution that wrecked the economy.
Analysts do not see inflationary pressures imminent, but the PBOC has warned that inflation could pick up once consumption recovers. Consumer inflation fell to 2.1% in October.
On November 21, the central bank leCentre County Report interest rates unchanged for the third straight month. The interest rate for one-year loans (LPR) was kept at 3.65%.
The yuan has fallen about 10% against the US dollar this year despite China’s capital controls.
($1 = 7.1644 yuan)