China’s Economy:RRR And Rate Cuts Do Not Mark An End of Loose Policies

Weak real economy continues. The Q3 data released last week continued to be disappointing. Although non-financing sector GDP recovered from 5.9% in Q2 to 6.1%, the growth was limited. The production-side industrial added value and the demand-side investment data continued to fall, indicating greater downward pressure on the economy. High-frequency data showed the production remained weak. Coal consumption of six largest power generation groups continued to decline significantly y/y, with decline in a single week expanding to above 15% and capacity utilization rate further declining. Driven by easing policies, property demand picked up again as real estate sales growth y/y in 30 larger cities maintained to be around 10%. Given the base data effect, real estate transaction remained to be strong. With continued introduction of real estate-friendly policies and raising stake of easing policies, demand for properties will keep recovering. Generally speaking, the real economy is still relatively weak, foundation for a supply and demand balance is not solid yet, and easing policies are still needed for the economy continue to grow.

    PBOC launched new RRR cut and rate cut, indicating more loose policies. Following its RRR cut and rate cut in late August, PBOC launched another round of RRR cut and rate cut this Friday, with the benchmark deposit rate and lending rate hitting all-time low. The lift of deposit rate ceiling marks a step forward toward interest rate liberalization. More loosen polices were introduced due to greater downward pressure on the economy. PBOC rate cut helps to reduce financing cost of the real economy, driving down bond yields. Liquidity of over 800bn yuan to be released by the RRR cut will effectively offset capital outflow impact, supplement liquidity and increase financial institutions’ lending and social financing sources. Meanwhile, PBOC launched 105.5bn yuan MLF last week and will continue to inject liquidity through multiple channels, in order to offset capital outflow.

    Loose policies fail to reverse the weak economy and other policies are required to take co-effect. Credit and social finance grew sharply starting from June. However, the real economy hasn’t shown significant signs of recovery and the transmission of the monetary policy is not smooth. At present, the SBC sector continues to distort the allocation of resources and financing entities are not sensitive to interest rate. Change the situation requires multiple-aspect reforms including the fiscal system. Due to downward pressure on the economy, the PBOC’s rate cut and RRR cut act as a timely rain. However, other supporting measures must be launched to stabilize economic growth. Meanwhile, to cope with financial bubble risks, financing oversight needs to be strengthened.