China’s V-shaped recovery has hit a soft patch. May’s exports, industrial production, investment and retail sales and June’s purchasing manager indices were all below expectations.
Source: Bank of Singapore, Bloomberg
Temporary factors have hurt manufacturing and exports including chip shortages, power cuts and an outbreak of the virus in the major hub of Guangdong. Infrastructure investment has also moderated as local governments have borrowed less for new projects as the pandemic recedes. At the same time, micro measures - for example, to curb property leverage, spur decarbonization and tighten data security - have contributed to a broader slowdown. Thus, June’s consumer price index (CPI) inflation was tame at 1.1%YoY as the first chart shows.
Source: Bank of Singapore, Bloomberg
The authorities have decided to respond to the economy’s soft patch by easing liquidity. In a timely move signaled earlier by China’s State Council, the People’s Bank of China (PBoC) announced late on Friday that all commercial banks’ reserve requirement ratios (RRRs) would be cut by 0.50% this month. The news was broader-than-expected and thus surprised financial markets fearful of a broader slowdown in China’s economy for the rest of the year.
By letting each bank set aside less of its deposits in reserves, officials aim to counter the economy’s recent soft patch by boosting liquidity and thus enabling banks to lend more. At the same time, the PBoC stressed monetary policy would stay ‘stable’ so its move aims to fine-tune activity rather than ignite borrowing. But while the central bank’s overall stance remains neutral and thus is unlikely to result in a series of RRR cuts or declines in benchmark interest rates this year, its dovish surprise supports China’s outlook for the second half of 2021. For example, banks will be able to facilitate faster issuance of local government bonds to fund new spending.
The second chart shows total social financing (TSF) slowed to 11.0%YoY in June from 13.6%YoY in October. But broad credit growth is now likely to pick up after the PBoC’s move to the benefit of China’s risk assets and commodities globally. We thus keep our forecast for GDP to grow strongly by 8.7% in 2021 and see the CNY rising to 6.25 against the USD over the next 12 months.Disclaimer applicable to recommendation
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