PBOC ramps up easing rhetoric heading into 2022

Goldman Sachs with the note:

Bottom line:

The PBOC held its Q4 monetary policy committee meeting on December 24th, with the meeting statement released on the evening of 25th December. The PBOC’s Q4 MPC meeting echoed Beijing’s stance at the recent Central Economic Working Conference (CEWC) – it emphasized policymakers would step up support to the real economy. Compared with the Q3 PBOC monetary policy committee meeting statement, the Q4 statement appeared more pro-growth: policymakers acknowledged growth headwinds, pledged for more pro-growth policy support, and slightly softened its tone on the property sector; it also stated an intention to increase the use of structural monetary policies, especially favoring SMEs, high-tech sectors and green industries. Meanwhile, the PBOC continued to call for a boost in
domestic demand, a lowering of the average financing costs for firms, increasing policy coordination among ministries, and keeping the economy growing in a reasonable range.

Main points:

1. Compared to its Q3 statement, the PBOC at its Q4 MPC meeting turned more cautious on its growth outlook, indicated an intention to use broad and targeted policy tools to support the real economy in a more pro-active manner, and on the margin eased its tone on the property sector. However, these new changes were in line with key messages from the recent CEWC, signaling more policy easing measures underway.

2. We highlight several key points from the statement:

  • On growth outlook, in the Q4 statement, the PBOC dropped its judgement that “the overall economy continues to recover” from Q3, and echoed the CEWC stance to emphasize the “three types of downward pressure” the economy is facing: i.e., contracting demand, supply-side shocks and weakening market expectations. Besides, PBOC continue to believe the external environment has become more complex and uncertain.
  • On policy stance, the PBOC reiterated the need to “keep liquidity conditions reasonably adequate, increase the stability of credit growth, keep M2 and aggregate financing growth largely in line with nominal GDP growth, maintain a broadly stable macro leverage and lower the financing costs for the corporate sector”, the same wordings as the Q3 meeting. PBOC further added its intention “to strengthen cross-cycle policy adjustments, combined with counter-cyclical adjustments” and required monetary policy to be more pro-active (a new phrase in the statement), forward-looking, precise, and independent, in an effort to better support the real economy. PBOC also stated it would proactively increase the use of structural monetary policy tools, and guide financial institutions to better support SMEs, high-tech sectors and green industries.
  • On the RMB, the PBOC’s tone remained unchanged from its Q3 statement, as it continued to require increasing flexibility of the RMB exchange rate, striking a good balance between internal and external equilibrium, and keeping the RMB exchange rate basically stable at a reasonable equilibrium level.
  • On the property sector, in the Q4 statement, the PBOC said it would safeguard the lawful rights of housing consumers, better meet the reasonable housing demand from homebuyers, and promote the healthy development and a virtuous circle in the property markets. By comparison, in Q3, it only stated to safeguard the healthy development of the property markets and lawful rights of housing consumers.
  • In line with the CEWC, the PBOC reiterated the importance to ensure “Six Stabilities” and “Six Guarantees” (i.e., stability in employment, financial operations, foreign trade, foreign investment, domestic investment, and expectations; guaranteeing job security, basic living needs, operations of market entities, food and energy security, stable industrial and supply chains, and the normal functioning of primary-level governments). Meanwhile, unchanged from its Q3 statement, the PBOC called for strengthening the coordination with fiscal, industrial and regulatory policies, better planning and implementing financial policies to support growth and contain risk, and keeping the economy growing in a reasonable range, “in preparation for the 20th National Congress of the Chinese Communist Party (NCCCP)”.

3. We view the Q4 monetary policy meeting statement as being consistent with our expectation on more monetary policy easing. Specifically, we expect the central bank to inject more long-term liquidity via RRR cuts (we expect one more cut in Q1 2022) and various lending facilities, on-budget fiscal expenditures to be more supportive to growth compared with 2021, and local governments to ease property policies at local levels. We note that headwinds to growth remain however, as the property market might continue to cool, the zero-Covid strategy could drag on consumption amid recurring Covid waves, and Beijing’s anti-pollution measures prior to the Winter Olympic Games early next year could also weigh on industrial production.

Unconventional Economist

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