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 For now, policy easing is likely to come in the form of help to the
most vulnerable sectors, rather than more aggressive steps such as
cutting interest rates, but authorities are ready to step in with
bolder measures if unemployment rises, policy insiders told Reuters.
China's central bank reportedly stepped in this week to avert any
further shocks to the world's second-largest economy.
The People's Bank of China offered to lend $81 billion to big banks
to reduce the risk of a credit crunch and a jump in interest rates
heading into the long "Golden Week" holidays in early October, when
demand for cash typically soars.
Despite the move, short-term lending rates dipped only briefly on
Thursday, and traders said borrowing costs will start to rise again
soon unless the PBOC continues to pump money into the system,
highlighting growing nervousness in the market.
"Chinese authorities will likely introduce more supportive policies,
including favorable tax and mortgage policies, before the end of
this year to ease the downward pressures on the property market,"
ANZ economists Liu Li-Gang and Zhou Hao said.
"We thus expect more monetary policy easing in the remainder of this
year, if the upcoming data continue to remain lukewarm. We cannot
discount the possibility of an outright 50 basis point RRR cut (in
bank reserve levels) for the whole banking system, or even a policy
rate cut."
Analysts at Barclays were even more certain that policymakers will
have to administer stronger medicine soon.
"Interest rate cuts are inevitable," they said in a note to clients,
adding that the central bank's decision to lower the yield for its
14-day repos by 20 basis points on Thursday was a sign of the times.
"Today's move sends a clear and strong signal, in our view, that the
People's Bank of China is more convinced that it needs to make more
effort to guide interest rates lower," Barclays said. It predicted
two interest rate cuts of 25 basis points each between October and
March 2015.
Lower rates could arrest the cooldown in China's once red-hot
property market, where fizzling growth is increasingly dragging on
the broader economy, sapping demand for housing-related products
from appliances and furniture to cement and steel.
Average new home prices across China fell 1.1 percent in August from
July, accelerating from last month's 0.9 percent drop, according to
a Reuters weighted home price index calculated from official
figures.
Price falls spread to a record number of cities, and further
declines are expected as cash-hungry developers cut asking prices
and offer bigger discounts to attract buyers. Some economists think
the slide will persist well into next year, citing huge inventories
of unsold homes. [ID:nL3N0RJ18B]
Four consecutive months of declines in home prices has left China's
housing market close to wiping out its gains over the last year, a
trend that could further hurt consumer confidence.
The property market accounts for roughly 15 percent of the economy.
"The softness in real estate investment will remain one of the major
drags on economic growth," said Zhu Haibin, an economist at JPMorgan.
China's economy has had a bumpy ride this year. A bounce in growth
in the second quarter was cut short in July, and data suggest the
cooldown may have deepened since.
Stimulus measures announced earlier in the year already appear to be
losing their punch.
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Growth in factory output slid to a six-year low in August and import
demand fell unexpectedly for the second month.
"SO MUCH MONEY"
In addition to government moves to accelerate spending, the PBOC has
taken several steps this year to ensure ample liquidity and
encourage increasingly risk-averse banks to continue lending at
reasonable rates. Many banks still prefer to lend to state-owned
firms, starving private companies of capital.
The central bank has declined to comment on the move to inject
liquidity into the country's top five banks, via a policy tool known
as the Standing Lending Facility, or SLF.
As the SLF is only valid for three months and requires commercial
banks to pay for its use, analysts are divided about its impact on
the real economy, while acknowledging it gave at least a short-term
psychological boost to money markets, where banks lend to each
other.
"Our bank is busy this morning lending with so much money in the
market now," said one trader at a Chinese commercial bank in
Shanghai, following reports that the central bank was offering to
inject more money into the system.
Some argue that the extra funds were intended to help banks meet
higher demand for cash at the end of each quarter, especially ahead
of the long holiday. A flurry of stock market initial public
offerings (IPOs) in coming weeks had been expected to amplify those
seasonal stresses this year.
Short-term rates stabilized on Thursday, with the seven-day
repurchase agreement rate little changed on the day. For the year,
the rate has dropped 155 basis points since Dec. 30, though many
economists are doubtful that longer-term borrowers are seeing any
relief.
Publicly, central bank officials and advisers said China is not
poised to unveil any dramatic stimulus to boost its economy.
"The central bank is erring on the side of caution by offering more
than it usually would," said the analysts at Capital Economics, in
reference to the latest liquidity move.
"Many have been forecasting a turn to broad stimulus in China for
some time. The central bank’s injection of liquidity has not changed
our view that this remains wishful thinking," they said.
The government's bottom line is stable employment and no widespread
debt defaults. Under that scenario, growth of 7.3-7.4 percent this
year is seen as acceptable, sources said. Beijing's official target
is around 7.5 percent.
(Reporting by Shao Xiaoyi in BEIJING and Lu Jianxin in SHANGHAI;
Writing by Koh Gui Qing in BEIJING)
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