By Liangping Gao, Ellen Zhang and Marius Zaharia
BEIJING/HONG KONG (Reuters) – China’s central bank has moved to a more aggressive easing policy, but its policies are not aimed at the biggest enemy of economic growth: persistently weak consumer demand.
The liquidity injections and lower borrowing costs reported by the Chinese central bank on Tuesday have improved market sentiment, mainly because expectations have been raised that the authorities will soon come up with a fiscal package to complement the monetary and financial measures.
The world’s second-largest economy is facing strong deflationary pressures and risks missing its growth target of around 5% this year, due to a sharp decline in the housing market and weak consumer confidence. Analysts say this can only be solved by fiscal policies that give consumers more money through higher pensions and other social benefits.
“The central bank’s policy exceeded expectations, but the biggest problem in the economy today is not the lack of liquidity,” said Shuang Ding, chief economist for Greater China and North Asia at Standard Chartered.
“In terms of helping the real economy, I think there will be another policy package, particularly on the fiscal front.”
Fred Neumann, chief Asia economist at HSBC, agreed, saying authorities need to stimulate demand, which can be done “through other policy measures, such as fiscal policy.”
While the PBOC is implementing its boldest measures since the pandemic, the overall size of the stimulus remains limited and analysts question its overall effectiveness.
Given weak credit demand from households and businesses, the 1 trillion yuan ($142 billion) released into the financial system by cutting reserve requirements for banks could lead to more purchases of government bonds than lending to the real economy.
Companies “have been reluctant to borrow for years, regardless of credit conditions, because corporate sentiment is so poor,” the China Beige Book said in a note.
“And households will not respond to poorer savings returns by suddenly becoming more optimistic.”
Cutting existing mortgage rates will free up an additional 150 billion yuan per year for households. But that is only 0.12% of annual economic output, and some of that can be saved for early mortgage repayments.
According to Raymond Yeung, chief economist for Greater China at ANZ, Chinese consumers spend only 35 yuan for every extra 100 yuan they receive.
The main 20 basis point rate cut is larger than normal but smaller than what most central banks typically do. The US Federal Reserve cut rates by 50 basis points last week.
“Each of the major monetary policy measures announced by the PBOC has been used in the past and previously had minimal economic impact,” analysts at Gavekal Dragonomics said in a note, describing the size of the package as “modest.”
“The significance of this package therefore lies mainly in the question of whether it opens the door for other steps.”
MORE STIMULI?
By injecting liquidity, the PBOC gives the government more room to issue debt for additional stimulus, Neumann said.
“The market is hoping that the liquidity injections are a signal that a large bond issuance program may be announced in the coming weeks,” he added.
Lynn Song, chief economist for Greater China at ING, said the most direct way to stimulate the economy in the short term is through more government investment. “However, economists increasingly advocate demand support, which could include consumer vouchers or similar policies.”
The beaten path is investment. To meet its 2023 growth target, Beijing announced in October last year an additional 1 trillion yuan in special government bonds to finance various infrastructure projects.
It is unclear to what extent the additional stimulus measures would be different this year.
Officials in July signaled a marginal shift in spending toward consumers by subsidizing purchases of new appliances and other goods, seen as a small step toward what many economists have been demanding for years from Beijing to address its broad imbalance between investment and consumption.
The share of household consumption in annual economic output is about 20 percentage points below the global average, while the share of investment (government-driven, debt-financed, and with diminishing returns) is 20 percentage points above it.
This could be solved by transfers from the state sector to consumers.
Analysts at Nomura said in a note on the PBOC package that Beijing could increase pensions and health benefits for low-income groups and subsidize childbirth to make some progress in rebalancing the economy.
But they warn that such steps may not be taken anytime soon.
“We do not believe that these monetary and financial policies alone are sufficient to halt the deepening economic slowdown,” the spokesmen said.
“We believe fiscal stimulus should play the most important role, although we encourage investors to temper their expectations.”
($1 = 7.0331 Chinese Yuan Renminbi)
(Written by Marius Zaharia; Edited by Shri Navaratnam)
