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Chinese Easing May Not Be as Strong as First Thought - Analysts

Economy May 20, 2022 15:52
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By Geoffrey Smith -- China’s latest monetary policy easing may not be the big deal that the initial market reaction would lead you to believe, analysts said Friday.

Chinese assets strengthened at the end of a rocky week on Friday after the People’s Bank of China announced a cut in its five-year benchmark interest rate by 15 basis points to 4.45%, a larger move than the usual 5 or 10 basis point steps that it typically uses.

The USD/CNH rose 0.5% to 6.6960 to the dollar, while the Shanghai Shenzhen CSI 300 index rose 2% to close at its highest level in four weeks.

However, the PBoC left its more important 1-year prime loan rate unchanged at 3.70%. As the PBoC itself styles the one-year rate as the more important of the two, the message appeared to be that the central bank – after a recent cut to the Reserve Ratio Requirement still either can’t or doesn’t want to relax funding conditions for the broader economy any further at present.

The nuanced move left itself open to various interpretations. Iris Pang, chief economist for Greater China with ING, argued that it suggests the PBoC is still eager to avoid increasing leverage in the overall economy. Others took it as a sign of increased confidence that broad support may not be necessary, given the progress of the crucial economic center Shanghai in bringing its Covid-19 outbreak under control.

The five-year rate usually serves as a reference for long-term mortgage rates. This was illustrated by the near-simultaneous announcement in the China Securities Journal that a number of major lenders in the cities of Suzhou, Zhengzhou, and Tianjin have lowered minimum mortgage rates for purchases of first homes to 4.4%. Others are highly likely to follow.

However, mortgage rates are unlikely to help the broad mass of population much, said Paul Donovan, chief economist with UBS Global Wealth Management, in a morning briefing.

“It helps - a bit,” Donovan said, in so far as reduced mortgage costs will allow borrowers more space to draw down savings while Covid restrictions last, and allow them to rebuild their savings faster once they ease. That aside, he said, the PBoC’s move “leaves everyone else unaffected.”

“PBoC easing remains incredibly modest,” said Pantheon Macroeconomics analyst Craig Botham via Twitter, pointing out that the five-year rate is effectively adopted from the banking sector rather than dictated to it.

The thesis of state-controlled banks getting ahead of the PBoC is not easy to prove but would be consistent with other signs suggesting that the authorities in Beijing are starting to be concerned by the PBoC’s relatively slow pace of policy easing.

The step comes in the same week that the head of the central bank’s monetary policy unit was removed from his post, under investigation for suspected violations of securities law (a shorthand for insider trading).

Chinese Easing May Not Be as Strong as First Thought - Analysts

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