16 August 2023
Enodo QuickTake
More Policy Support on the Cards
- We expect China to announce bigger fiscal stimulus...
- ...after Monday's rate cut failed to lift confidence
- Beijing hopes to cushion itself from a painful real economy crisis as...
- ...debt malaise weighs on downtrodden "animal spirits"
- As expected, on Monday Beijing cut the rate on its one-year loans -- or medium-term lending facility (MLF) -- by 15 basis points to 2.5%, the steepest cut since 2020. The rate on seven-day reverse repos -- a benchmark for short-term borrowing costs -- was also cut by 10 bps. This has paved the way for China's biggest banks to lower both the one-year and five-year loan prime rate (LPR) on August 20th.
China’s interest rate corridor
%
Source: Enodo Economics, CEIC
- Markets were unimpressed by the cut. News that Zhongzhi Enterprise Group Co -- one of the largest financial conglomerates in China -- missed payment on some of its wealth management products added to the real estate sector woes, already reignited by Country Garden's troubles, amid generally weak July data.
Broad money growth
Yoy
Source: Enodo Economics, CEIC
- More policy support is needed, and as we have discussed in the last few weeks, we expect it will be forthcoming. The issuance of another sizable tranche of special purpose bonds, special treasury bonds and/or central government bonds is on the table as well as lowering banks' reserve requirement ratio.
Chinese central government bond issuance
Rmb trn, ytd to June 2023
Source: Enodo Economics, Wind
- Beijing is likely to find it hard to revive China's sapped "animal spirits" as Xi is unlikely to abandon his statist policies. Meanwhile, China's debt problem has now reached dangerous proportions as we have warned for the past year. A larger stimulus could buoy investor confidence in the short-term but it will only be enough to provide some cushion to China's slow-motion real economy crisis.
Debt by sector in China now and the majors in 2009
% of GDP, BIS data
Source: Enodo Economics, CEIC