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Monday, December 4, 2023

Experts Expect PBOC’s Accommodative Policy to Continue

BusinessMacroExperts Expect PBOC's Accommodative Policy to Continue

China’s monetary policy is expected to remain supportive of boosting consumer spending as inflationary pressures remain muted, experts said on Monday. The People’s Bank of China (PBOC), the country’s central bank, will need to ensure ample market liquidity and reduce the financial burdens facing homebuyers to increase their spending power.

This comes as the market is closely watching the medium-term lending facility operation of the PBOC scheduled to be delivered on Wednesday. The MLF is an instrument that allows the central bank to provide loans to financial institutions to adjust market liquidity and determine the policy interest rate benchmark. On Wednesday, MLF loans worth ¥300bn ($43.9bn) are expected to mature.

Lou Feipeng, a researcher at Postal Savings Bank of China, said it was reasonable for the MLF operation to inject additional liquidity on top of rolling over the maturing amount to meet market demand for liquidity and back the country’s economic recovery. “Mild inflation has provided bigger space for monetary policy to manoeuvre,” Lou said.

The growth in China’s consumer price index, a key indicator of inflation, remained mild at 2.1% YoY in January, albeit up from 1.8% in December, according to the National Bureau of Statistics.

Lou said targeted monetary support should also be amplified to boost consumer spending. “Measures to reduce the interest burden brought by outstanding mortgages can help ease households’ financial pressure and boost consumer spending.” Data from the PBOC showed that household credit demand has remained sluggish despite fast aggregate credit expansion.

New yuan-denominated loans increased by ¥922.7bn YoY to ¥4.9tn last month, the highest level on record, according to the PBOC. New yuan loans to households, however, dropped from ¥843bn a year ago to ¥257.2bn in January. Experts attributed the drop to consumer confidence that has yet to fully recover and lingering weakness in property sales.

Su Jian, a professor at Peking University’s School of Economics, said a key focus of monetary policy should be further promoting a steady development of the property market, which has a direct bearing on people’s lives. Some homebuyers have reportedly sought to repay their mortgage principal earlier than scheduled as they deemed the interest burden of their mortgages relatively high.

Su said tamping down interest rates of outstanding mortgages should be conducive to boosting consumer spending, adding that it is still reasonable to cut the interest rate of MLFs to ease the financial cost of households and businesses.

Zhou Maohua, a macroeconomic analyst at China Everbright Bank, said he expects the MLF interest rate to remain unchanged on Wednesday as the PBOC may need to further gauge the strength in credit demand after January’s strong recovery. China last cut the MLF interest rate in August by 10 basis points to 2.75%.

Given that consumers’ credit demand remains lukewarm, multipronged financial policies are expected to promote consumer spending, including reducing the cost of borrowing consumer loans and stabilising the property market, Zhou said.

A recent executive meeting of the State Council, China’s Cabinet, decided that consumer loans will be increased as appropriate, while a city-specific approach should be taken to meet people’s basic housing needs and the need for improved housing conditions.

To boost the property market and curb oversupply, the government has reduced the minimum down payment requirement for second-home buyers in most cities and exempted those who have fully paid back their first mortgage from paying deed tax when they buy a second home. It also increased land supply for residential development and encouraged mergers and acquisitions among property developers.

In December, China’s top leadership vowed to strengthen financial support for small and medium-sized enterprises and reduce the cost of borrowing by cutting banks’ reserve requirement ratios.

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