UK Car Lending

China rate cut as economy counts cost of Covid Zero By Bloomberg

© Reuters.

(Bloomberg) – China will likely release the weakest monthly economic indicators since the pandemic hit two years ago, putting pressure on the central bank to boost stimulus to support growth.

Economists are still divided on whether the People’s Bank of China will act on Monday by cutting the interest rate on one-year loans. The central bank must weigh the economy’s need for further monetary stimulus against concerns that excessive easing at a time when the US Federal Reserve is raising rates will fuel capital outflows.

The PBOC’s tariff decision is expected to come shortly before the government releases monthly economic data revealing the extent of the damage caused by the Covid shutdowns in April in major hubs like Shanghai and elsewhere. The figures are expected to show a sharp deterioration in retail sales, industrial production and investment over the month.

The unemployment rate, which is expected to rise to its highest level in two years, will also be in focus after top leaders recently made urgent pledges to stabilize employment in the face of falling business confidence.

Here’s a look at the rate decision and economic indicators, which are due Monday.

Policy rate

Thirteen of 25 economists polled by Bloomberg expect the one-year medium-term lending facility rate to remain unchanged at 2.85%. Of the 12 expecting a cut, five expect a cut of 5 basis points, six see a cut of 10 points and only one expects the rate to be reduced to 2.7%.

The PBOC faces a set of competing factors that complicate policy considerations. The fall in economic activity in April reinforces calls for further monetary easing to support growth. Some economists also argue that the central bank needs to use the current easing window before further rate hikes from the Fed restrict its room for maneuver.

Others point to factors that will further limit easing: the PBOC has raised concerns about inflationary pressure as well as monetary policy tightening at the Fed and elsewhere, which has triggered a sharp depreciation of the yuan against the dollar since the end of April and an increase in capital outflows.

“A benchmark rate cut may have limited short-term wiggle room with the Covid disruptions and Fed hike, so the preferred mode of easing may revert to quantity-based easing,” he said. said Liu Peiqian, China economist at NatWest (LON:) Group Plc. .

In addition, some say commercial banks may be able to lower the prime lending rate – the de facto benchmark lending rate – at the end of next week, even without a policy rate cut. The PBOC advised banks to lower their deposit rates by 10 basis points in April, a move that allows them to lower lending rates without hurting their profits.

The PBOC has refrained from cutting policy rates since January and instead stepped up efforts to introduce new structural tools to help targeted sectors, disappointing investors who called for more aggressive easing. Deputy Governor Chen Yulu told a briefing on Thursday that the central bank had stepped up policy action and steered lending rates lower.

Read more: PBOC says it is making stabilizing growth a higher priority

On Monday, the PBOC is likely to roll over the 100 billion yuan ($15 billion) of maturing medium-term loans without providing additional liquidity, according to 10 of 15 economists polled by Bloomberg. The others see a net injection of 50 to 100 billion yuan.

Liquidity in the interbank market remains abundant, after the PBOC cut the reserve requirement ratio, or the amount of cash banks must hold in reserves, in April. It has also transferred 800 billion yuan in profits to the central government so far this year, which has had the equivalent effect of reducing the RRR by 0.4 percentage points, according to a PBOC official.

In fact, a glut of liquidity has pushed a gauge of short-term borrowing costs to the lowest level since 2020, well below the key seven-day reverse repo rate. A key rate on one-year interbank loans also fell below the MLF rate in May.

Job drop

Pressure on China’s labor market is mounting as prolonged and widening shutdowns force more people to lose their jobs or be furloughed. The outlook was already bleak even before the outbreaks: record numbers of graduates are expected to join the workforce this summer and a Chinese regulatory crackdown has triggered large-scale layoffs at tech and after-school tutoring companies.

The surveyed urban unemployment rate is expected to reach 6% in April, the second highest on record after peaking at 6.2% in February 2020. Normally, the rate would drop in April after a seasonal peak around the Spring Festival.

This has made jobs a top priority for policymakers, with officials making repeated and frequent calls to keep jobs. On Wednesday, Premier Li Keqiang said fiscal and monetary policies should make jobs a priority and pledged to use several policy tools to stabilize jobs. A few days earlier, he had warned of a “complicated and serious” employment situation.

Li’s deputy Hu Chunhua also made similar calls for officials to “closely monitor changes in the employment situation and identify emerging issues in a timely manner.”

What Bloomberg economists say…

“China’s April activity data is likely to give a worrying reading – revealing the extent of damage to the economy from the shutdowns in Shanghai and other parts of the country. The advanced and high-frequency data sound the alarm, production and investment have probably slowed sharply and retail sales have probably fallen further.

–Chang Shu, David Qu

See here for the full report

Low consumption

Consumption likely deteriorated further in April after nationwide mobility restrictions were extended. Economists expect retail sales to have contracted 6.2% last month, the worst since the start of 2020 when the coronavirus first hit China.

The suspension of restaurant services in several provinces is expected to deal a major blow to restaurant revenues, which account for about 10% of retail sales. Automobile sales, another key component of retail sales, fell the most in two years in April as Covid-19 shutdowns in the auto industry centers of Shanghai and Jilin province pushed disrupted production and prevented buyers from entering showrooms.

factory slide

Industrial production has probably also slowed, notably due to various restrictions. Factories in pandemic-hit areas have been forced to close or maintain limited operation under the so-called ‘closed-loop system’, where employees are kept in factories and undergo regular Covid tests to prevent infections. epidemics.

Even as factories managed to stay open, production was capped by raw material shortages, long delays and a global supply chain crisis. Industrial production growth is expected to weaken to 0.5% in April, according to a Bloomberg survey of economists. That would be the slowest pace since March 2020.

Investment growth for the first four months of the year likely slowed to 7% from 9.3% in the first quarter, largely buoyed by government efforts to accelerate infrastructure projects. Real estate investment is expected to contract by 1.5% in the January-April period from a year earlier, which would be the first decline since May 2020, as sales and confidence in the sector continued to collapse in the middle of the closures.

©2022 Bloomberg LP