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While most major central banks are tightening policy, China is easing. On Monday China’s central bank cut two key interest rates, accelerating the government’s efforts to keep the economy’s slowing momentum from running into intractable ground.
That the rate cuts came on the same day that China announced full year and fourth quarter GDP growth that was slightly above expectations underlines policymakers’ concern over the impact of rising headwinds. The moves also suggest more easing may be in the pipeline.
Policymakers in the world’s second largest economy are contending with a property sector downturn, the prospect of Omicron threatening to derail its ‘zero-Covid’ policy, a soft global macro picture, and the lingering effects of last year’s broad domestic regulatory crackdown. Monday’s rate cuts also underline the increasingly asynchronous directions of growth cycles in the world’s largest economies, coming just as the US Federal Reserve and the European Central Bank are likely to phase out stimulus and hike rates to battle inflation.
The People's Bank of China said it would lower the cost of borrowing on its one-year medium-term lending facility and seven-day reverse repurchase agreements, or repos, by 10 basis points each. In the case of its medium-term loans, which would be trimmed to 2.85 per cent, the cut is its first since April 2020. The repo rate was lowered to 2.10 per cent. The cuts on Monday inject some 800 billion renminbi ($125 billion) in liquidity to the banking system.
The cuts appear to extend a policy easing campaign started in December, reinforced by other regulatory measures including a quicker-than-expected decision on gaming licenses for casino operators in Macau. More easing could follow, including to other benchmarks like China’s loan prime rate, which was already cut last month. Further such supportive measures would boost infrastructure investment and stabilise property investment, helping to lower mortgage rates in some cities and spur infrastructure projects.
Over the mid-term horizon, the key challenge for the government is to keep macro leverage in check while trying to revitalise growth and guard the bottom line of "no systemic risk" - a difficult balance to strike.
A different drum
At first glance, the rate cuts and policy easing appear somewhat incongruous with the economy’s 8.1 per cent year-on-year expansion last year, which was also announced on Monday by China's National Bureau of Statistics, and came in as expected above the government’s official 6 per cent target for annual growth.
The robust growth data was largely the consequence of a stellar export-led outperformance last year. But by the second half of 2021, a confluence of factors piled on to erode the momentum, including power outages, semiconductor shortages, and a series of regulatory measures aimed at a wide swath of domestic sectors like tech, education, and residential real estate. Fourth quarter GDP growth was 4.0 per cent from a year earlier, sharply lagging the first half’s 12.7 per cent rise, though real growth of 5.2 per cent in the last quarter showed marginal improvement from the third.
China’s property development investment and retail sales remain weak, though industrial output has been improving since October. Still, fourth quarter data was better than market expectations. Despite a sharp decline of property investment growth and weak consumption during that period, average GDP growth over two years remained above 5 per cent.