Asia

China central bank to tread warily on easing amid stagflation risk – policy sources

BEIJING (Reuters) – China’s central bank will likely move cautiously on loosening monetary policy to bolster the economy, as slowing economic growth and soaring factory inflation fuel concerns over stagflation, policy sources and analysts said.

FILE PHOTO: A man wearing a mask walks past the headquarters of the People’s Bank of China, the central bank, in Beijing, China, February 3, 2020. REUTERS/Jason Lee

Momentum is faltering in the world’s second-largest economy due to fresh curbs to control COVID-19 outbreaks, power shortages that have hit factories and a debt crisis in the real estate sector, among other factors that have gummed up activity.

Chances of a rate cut look slim, but the central bank may opt to cut the amount of cash banks must hold as reserves against their loans if growth suffers, according to sources involved in internal policy discussions.

Economic growth is widely expected to slow further in the fourth quarter from a one-year low of 4.9% in the third quarter. Factory activity shrank for a second month in October, an official survey showed, while factory output growth eased to the lowest since March 2020, due to environmental curbs, power rationing and higher raw material prices.

The People’s Bank of China (PBOC) has defied market expectations for cutting interest rates or banks’ reserve requirement ratio (RRR), after a broad-based RRR cut in July, focusing instead on deleveraging and fending off property bubbles.

Some economists had thought the central bank could cut interest rates this year but now feel stagflation – rising prices combined with high unemployment and weak demand – is a concern.

Producer price inflation has picked up since July, and likely further quickened to 12.4% in October, which would be the highest since October 1995, a Reuters poll showed.

The U.S. Federal Reserve’s policy tapering is unlikely to have much impact on the PBOC, which steers policy mainly based on China’s own growth and inflation outlook, they said.

“There is room for cutting interest rates and RRR, but the room could be limited by rising produce prices,” said a source.

The PBOC did not immediately respond to Reuters’ request for comment.

STAGFLATION RISKS

“As a result of power rationing and related supply constraints, the features of ‘stagflation’ have become more evident and would limit near-term policy options,” analysts at Citi said in a note.

Citi expects fourth-quarter GDP growth to dip to 4% while Nomura expects growth to drop to around 3.0% on both supply and demand shocks.

But some Chinese economists argue that China is nowhere near the stagflation that plagued the U.S. economy in the 1970s, preferring to use “quasi-stagflation” to describe a more complex economic picture.

Analysts expect producer price inflation to ease into 2022 while consumer inflation, forecast to hit 1.4% in October versus 0.7% in September, could steadily pick up.

Reflecting the official caution, most analysts have pushed back expectations for RRR or rate cuts into 2022.

“It’s unlikely for the central bank to cut interest rates and RRR within the year. Next year, we need to watch if PPI will fall, and also watch the Fed’s policy,” Tang Jianwei, senior economist at Bank of Communications, told Reuters.

A Reuters survey of fixed income analysts this month forecast no cut in the benchmark lending rate in November, and only 23% of analysts expected an RRR cut in the next three months.

But some government economists urge the PBOC to take faster action.

“We should consider a broad-based RRR cut in the fourth quarter to pump out more money and support growth,” Xu Hongcai, deputy director of the economic policy commission at the China Association of Policy Science, told Reuters.

A targeted RRR cut would be especially helpful for small businesses taking the brunt of rising prices.

Chinese leaders are due to chart the economic course for 2022 at a key meeting in December. Stability could be the watchword for next year, when the ruling Communist Party is due to unveil key leadership changes, policy insiders said.

“Stability will be the top priority in 2022,” Xu said, expecting economic growth to slow to between 5% and 6% in 2022 from an expected expansion of around 8% this year.

($1 = 6.3980 Chinese yuan)

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