China’s $17 trillion economy is on track to have one of its worst years in almost 50 years, but the country’s central bank doesn’t have many tools to help because it doesn’t want to encourage capital flight.
Policy sources and analysts say that this means the People’s Bank of China (PBOC) is likely to increase its targeted support for troubled sectors. This will add to the nearly $800 billion in loans it has already given out through its structural tools.
The People’s Bank of China (PBOC) wants to boost an economy that has been hurt by COVID-19 restrictions and a slump in the housing market. But they should avoid the aggressive stimulus that could make inflation worse and cause capital to leave China, which would make the yuan weaker.
Related: COVID protests are getting worse in Guangzhou as anger over China’s lockdown grows.
The PBOC has less room to move because of a global trend of tightening, which has been led by the U.S. Federal Reserve’s aggressive rate hikes to stop inflation. However, Fed Chair Jerome Powell has hinted that the pace of rate hikes will slow down.
Since 2020, when the coronavirus first shook up the world’s second-largest economy, the PBOC has added more structural policy tools, such as lending and rediscounting facilities and other low-cost loans, to its toolbox.
It has given cheap loans to help small businesses, the transport and logistics industries (which have been hit the hardest by COVID), and industries that fit with Beijing’s long-term goals for development, such as tech innovation, care for the elderly, and reducing carbon emissions.
“The central bank is likely to make structural policy tools more powerful and use them more often,” said a person involved in policy discussions who asked not to be named because they were talking about policy.
“We won’t use stimulus like a flood, but we will make policy more targeted and efficient to make sure there is enough liquidity.”
Reuters asked the PBOC for a comment, but they didn’t answer.
At the end of September, the country still owed nearly 5.6 trillion yuan ($781.64 billion) in loans that were made through structural tools.
Last month, the PBOC promised 200 billion yuan in special loans to save the property market. In October, it gave 154.3 billion yuan in loans to policy banks through its PSL facility to pay for infrastructure projects.
Last week, the central bank said it would cut the reserve requirement ratio (RRR) for banks for the second time this year. This will free up about 500 billion yuan in long-term liquidity and make it harder to use the traditional tool. The average reserve ratio went from 14.9% in 2018 to 7.8% in 2019.
Iris Pang, chief economist for Greater China at ING, said in a note that she thinks the PBOC will use some kind of unconventional monetary policy to make this RRR cut work better.
Pang said that the central bank could increase the amount of money it lends to small businesses, increase the amount of money it lends to unfinished residential projects, and work with commercial banks to speed up the growth of loans to get more money into specific sectors.
POLICY CONSTRAINTS
All eyes are on the Central Economic Work Conference in December, which will be held behind closed doors. This is where Chinese leaders will decide what policies will be used for the economy in 2023.
Chinese government advisers told Reuters that they would suggest growth goals for the economy of 4.5% to 5.5% for the year 2023. Last month, a central bank adviser said that China should set a growth goal for next year of no less than 5%.
Top leaders are likely to agree on a goal at the December meeting, but it won’t be made public until the annual meeting of China’s parliament, which usually takes place in March.
According to policy sources, Beijing will likely double down on its infrastructure push in 2023, issuing more debt to fund large projects while the PBOC supports it with some minor easing.
“We face some policy constraints because of what the Fed is doing,” Yu Yongding, a powerful government economist who used to advise the central bank, told Reuters.
“But there is room to loosen up on monetary policy as long as inflation doesn’t get worse.” “The slow growth rate is the biggest threat to China’s economy.”
Related: Oil prices will lose gains in 2022 because of China’s protests, which make people worried about demand.
This year, China is on track to miss the official growth goal of “around” 5.5%, and economists expect it to grow by about 3%. If you take out the 2.2% growth in 2020, it would be the slowest growth since 1976, which was the last year of the decade-long Cultural Revolution that wrecked the economy.
Analysts don’t see any pressure on inflation in the near future, but the PBOC has warned that inflation could pick up once consumption recovers. In October, consumer inflation slowed down to 2.1%.
On November 21, the central bank did not change its benchmark lending rates for the third month in a row. The lending prime rate (LPR) for a one-year loan was kept at 3.65%.
Despite China’s capital controls, the yuan has lost about 10% of its value against the U.S. dollar this year.
(1 US dollar = 7.1644 Chinese yuan renminbi)
