Policymakers are under pressure to fend off a sharp slowdown in growth that could threaten jobs and social stability, while avoiding the mistakes of 2014-2015, when aggressive policy easing and retail investor mania ended in a market crash.<\/p>\n
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ALSO SEE:\u00a0China May be Hit by Malaysia\u2019s Move to Slow Data Centre Growth<\/a><\/p>\n \u00a0<\/p>\n A Fed rate cut could give the People\u2019s Bank of China room to ease policy without risking capital flight or yuan depreciation, but policy insiders and economists say the central bank may wait for clearer economic signals rather than immediately follow the US move.<\/p>\n Financial markets expect the Fed to lower rates\u00a0by a quarter point at its September 16-17 meeting, with two more cuts likely by year-end. The benchmark rate has held steady at 4.25%-4.50% since December.<\/p>\n \u201cThe likelihood of a Fed rate cut will give more room for our monetary policy, but we may not necessarily follow,\u201d a policy insider involved in internal discussions said, declining to be named due to the sensitivity of the matter.<\/p>\n \u201cAny policy action will depend on the state of the (Chinese) economy. The stock market is very active right now \u2013 if we cut rates, wouldn\u2019t that just be like adding fuel to the fire?\u201d<\/p>\n \u00a0<\/p>\n Small rate cut in coming weeks, possibly<\/p>\n Ting Lu, chief China economist at Nomura, expects the PBOC to avoid cutting rates immediately if the stock rally persists, to avoid fuelling a bubble, but said it may deliver a modest 10-basis-point rate cut over the coming weeks if the markets correct.<\/p>\n So far this year, the PBOC has cut its key policy rate \u2013 the seven-day reverse repo rate \u2013 by 10 basis points and reduced banks\u2019 reserve requirement ratio by 50 basis points, with both moves announced in May as part of broader stimulus measures.<\/p>\n \u201cWhile rolling out high-profile rate cuts could fan the flames and inflate a stock market bubble, doing nothing risks worsening the growth slowdown,\u201d Lu said in a research note.<\/p>\n \u201cFaced with this dilemma, Beijing needs to tread carefully over the next couple of months, and the PBOC might be reluctant to follow the Fed in cutting rates in September.\u201d<\/p>\n \u00a0<\/p>\n Prolonged slowdown, dismal lending<\/p>\n Analysts\u00a0remain bullish\u00a0on Chinese stocks, noting that the rally is led by institutional investors, with retailers just starting to join. Chinese households, wary of spending or investing, sit on a record 160 trillion yuan ($22.45 trillion) in savings.<\/p>\n The world\u2019s second-largest economy has been hobbled by a prolonged slowdown, as advances in tech innovation and manufacturing have not fully offset declines in traditional industries, stoking increased employment pressures.<\/p>\n Recent data suggested the tide is unlikely to turn soon: July saw\u00a0factory output\u00a0growth at an eight-month low, retail sales slumping, and\u00a0new yuan loans\u00a0contracting for the first time in 20 years.<\/p>\n Exports\u00a0slowed in August as the boost from the US tariff truce faded, fuelling calls for more fiscal stimulus. With key August data due, some analysts expect new spending plans and housing support.<\/p>\n The\u00a0economy\u00a0grew 5.2% in the second quarter, aided by policy stimulus and a tariff truce with the US. This suggests sub-5% growth in the third and fourth quarters could still meet the 2025 target, easing pressure for aggressive stimulus. But policymakers must guard against any sharp slowdown that could threaten jobs.<\/p>\n Prior to the Covid-19 pandemic, China\u2019s economy grew at an annual average 6.7% pace during 2015-2019, according to government data.<\/p>\n \u201cTwo months of weak data could prompt Beijing to implement new mini-stimulus measures, especially for housing,\u201d said Larry Hu, chief China economist at Macquarie. \u201cFiscal policy, which has been less supportive recently, could also be ramped up.\u201d<\/p>\n \u00a0<\/p>\n Trade truce has helped<\/p>\n So far this year, the PBOC has eased policy less than expected, partly due to a tariff truce with the US that boosted exports early on. But the balancing act is becoming even more precarious, with higher stakes for China\u2019s economy and markets.<\/p>\n The PBOC has played a key role in supporting the stock market, using targeted tools such as swap schemes and relending programs to provide institutions with liquidity for share purchases.<\/p>\n Officials hope that rising stocks will help repair household balance sheets hurt by the property crisis and boost consumption and the broader economy. However, analysts caution that the economic benefits from higher stock prices remain limited.<\/p>\n The policy rate now stands at a record low of 1.4%, down 115 basis points since the start of the US-China trade war back in 2018. The weighted average RRR has been reduced from nearly 15% to 6.2%, also a record low.<\/p>\n \u201cUnlike the US, China has been continuously loosening monetary policy, so the room for further cuts is very limited,\u201d a second policy insider said.<\/p>\n \u00a0<\/p>\n Reuters with additional editing by Jim Pollard<\/p>\n \u00a0<\/p>\n ALSO SEE: \u00a0<\/p>\n \t\t\t\t
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