China’s Slowdown Seen Yet to Bottom Even After PBOC Acts

By Bloomberg News  

China’s growth trajectory is still pointing down, even after an $81 billion liquidity injection.
The People’s Bank of China move to provide 500 billion yuan of three-month funds to the nation’s five largest banks will help overcome any pre-holiday cash crunch, though is unlikely to move the needle on gross domestic product, according to economists at banks including Barclays Plc.
With Premier Li Keqiang vowing he won’t be distracted by short-term fluctuations as he maintains focus on structural adjustments, the fate of his 7.5 percent expansion target hinges on whether the injection marks the start of more easing or is just a temporary liquidity measure. UBS AG said it will take a deeper slowdown to spur an interest-rate cut as it
reiterated a call growth will slide below 7 percent next quarter.
“The bias is toward a bit more easing, but the steps are still relatively measured,” said Wang Tao, chief China economist at UBS in Hong Kong. “Growth will slow further in the fourth quarter, dragged down by further property construction weakness. That will bring about more policy support.”

China’s Economic Data

New-home prices fell in all except two cities monitored by the government last month as tight credit prolonged a downturn even as local home-purchase restrictions were eased. Prices dropped in 68 of the 70 cities in August from July, the National Bureau of Statistics said in a statement today, the most since January 2011, when the government changed the way it compiles the data.

Biggest Banks

The PBOC move was described by a government official familiar with the matter, who asked not to be identified because the measure hasn’t been formally announced.
The interest rate on funds provided to Agricultural Bank of China Ltd. and Bank of Communications Co. under the liquidity injection was 3.7 percent, Sina.com reported today, citing unidentified institutions. That compares with the three-month Shanghai Interbank Offered Rate of 4.63 percent.
The Beijing-based central bank hasn’t commented on reports about the action and didn’t respond to faxed questions yesterday or today.
Press officers for the five banks, including Industrial & Commercial Bank of China Ltd., declined to comment yesterday. A Shanghai-based press officer at Bocom declined to comment today on the Sina.com report, while Agricultural Bank wasn’t immediately available to comment.

Stock Market

News of the move spurred the first gain in six days for the Hang Seng China Enterprises Index, which rose 1.6 percent yesterday, while the yuan halted a four-day decline. The China Enterprises Index today fell 0.9 percent, and the yuan was little changed.
The PBOC’s targeted easing measures since June, including selective reserve-requirement cuts and other lending, have had a limited impact on the broader economy and probably only temporary effects on liquidity and stocks, Chang Jian, chief China economist at Barclays, said in a note yesterday.
“We do not think the expected targeted easing measures can arrest the moderating momentum,” Chang wrote.
Economists surveyed by Bloomberg News last month saw China’s growth slowing to 7.2 percent in 2015 from a projected 7.4 percent this year, based on median estimates. Analysts including Chang and Louis Kuijs at Royal Bank of Scotland Group Plc reduced forecasts after monthly data released Sept. 13 showed the weakest industrial-output expansion since the global financial crisis and moderating investment and retail sales growth.

Policy Stance

China will keep a “steady and prudent” monetary policy stance, Ma Jun, the chief economist for the research bureau of the People’s Bank of China, wrote in a commentary in today’s Financial News, published by the central bank. Strong stimulus measures aren’t needed because China is shifting its focus to employment from GDP, and monetary-policy easing will increase economic and financial risks, Ma wrote without discussing the liquidity injection.
Separately today, the central bank cut a rate it pays on repurchase agreements to the lowest level since January 2011, helping send interest-rate swaps down the most in five months.
Lu Ting, head of Greater China economics at Bank of America Corp., said in a note that Premier Li “will be forced to significantly step up” stimulus measures in coming weeks to arrest the slowdown in growth.

Lending Facility

Sina.com reported that the PBOC provided the funds under a program called the standing lending facility, introduced last year as a collateralized provision of funds to meet large-scale demands for financial institutions’ long-term liquidity and to help address fluctuations in money-market rates.
While the action was probably driven by considerations including economic weakness and liquidity volatility around the weeklong National Day holiday that starts Oct. 1, the fact that the PBOC used the SLF instead of a cut in banks’ reserve requirements suggests that the “central bank does not want the market to interpret it as a clear sign of monetary easing,” JPMorgan Chase & Co. economists wrote in a report.
The central bank has left reserve requirements for the largest banks and benchmark interest rates unchanged for more than two years.
Julian Evans-Pritchard, China economist for Capital Economics Ltd. in Singapore, said policy makers are being “relatively calm” and are trying to avoid spurring too much credit expansion as the nation makes a transition to a more services-based economy. “This is partly just fine tuning in order to make sure that the pace of the slowdown is not too extreme,” he said.