People walk past the headquarters of the People & # 39; s Bank of China (PBOC), the central bank, in Beijing, China, September 28, 2018.
Jason Lee | Reuters
BEIJING – China's central bank stands ready to move cautiously towards easing monetary policy even as the US is on its way to tightening monetary policy.
Moving in the opposite direction, the People & # 39; s Bank of China has to strike a delicate balance as policy makers keep a close eye on inflation and the rising cost of US dollar debt.
Analysts say that easing monetary policy may not come in overt steps like cutting the cash banks must hold as reserves or the RRR – one of many monetary policy tools the central bank has. Instead, China is likely to take targeted steps.
For one thing, a deviation from the USA could have many consequences for the market.
Jefferies' analysts pointed out in a statement on Monday that many Chinese companies, particularly real estate developers, have taken on large amounts of US dollar-denominated debt. That will be harder to repay as the US dollar rises or US yields begin to rise due to the Federal Reserve's planned reduction in asset purchases.
The Fed released minutes of the meeting last week showing that the US Federal Reserve is on track to tighten, possibly as early as next month. The move comes as US politicians worry whether inflation will persist.
China faces the same challenge. The producer price index, a measure of the production costs of factories, rose by a record 10.7% in September compared to the previous year.
"Persistent inflationary pressures limit the scope for monetary easing," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
But it is clearer than ever to many economists that China must slacken.
(China's) growth slowdown has reached a level that policymakers can no longer ignore, and we expect it to be gradually eased into three pillars – monetary, fiscal and regulatory.
BlackRock Investment Institute
Third quarter GDP data released on Monday showed that China's economy slowed more than expected. A lack of electricity has restricted factory production. Tighter debt regulations in the real estate industry have curtailed a sector that contributed to a quarter of China's GDP.
"The slowdown in growth has reached a level that policymakers can no longer ignore, and we anticipate gradual easing in three pillars – monetary, fiscal and regulatory," analysts at the BlackRock Investment Institute said in a statement on Monday.
Earlier this year, Beijing focused more on social issues, such as the high cost of raising children in a country with a rapidly aging population. Part of a regulatory crackdown in the summer was an abrupt order that after-school tutoring companies must drastically reduce their operating hours.
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Sun Guofeng, head of the People's Bank of China's monetary policy department, told reporters last Friday that the central bank's monetary policy remains "prudent". He said producer prices would likely remain high but moderate through the end of the year.
Sun also said the central bank was aware of the Fed's statement. He did not discuss whether the US actions would have an impact on China, saying repeatedly that China has many monetary policy tools.
Targeted monetary policy adjustments
Analysts have long suggested that China's unique economic structure is based on a series of monetary policy levers rather than a single interest rate.
"Monetary policy is being relaxed appropriately," said Zong Liang, chief researcher at the Bank of China, according to a CNBC translation in Mandarin on Tuesday.
While holding general monetary policy at "normal" levels, he said the central bank could ease policy on certain sectors. For example, the PBOC could help companies struggling to bear the high cost of raw materials. Zong also expects that support for stable economic growth will also include a boost for infrastructure.
He said China wants to avoid a situation where political support increases costs for ordinary consumers and businesses.
While producer prices rose by 10.7% year-on-year in September, the consumer price index remained subdued and only rose by 0.7% year-on-year.
With monetary policy changes in mind, many economists have lowered their expectations of China to lower the reserve requirement ratio (RRR) by the end of this year.
"We believe that the weak Q3 data will lead Beijing to further pull back its anti-growth measures," said Aidan Yao, senior economist for emerging markets in Asia at AXA Investment Managers.
Seeing a wider and sustained slowdown in the real estate sector is likely (the) biggest downside risk we have to watch.
senior economist Euler Hermes
He said the likelihood of a broad-based RRR cut has decreased following recent PBOC comments, but "a targeted move is still possible if growth continues to stall."
On the fiscal side, Yao expects local governments to provide approximately 1.3 trillion yuan ($ 203.3 billion) in cash from special bond sales over the next two months, which should "heavily support" infrastructure investments.
Shake up the real estate market
Yao noted, however, that Beijing's tight control over traditional channels of monetary policy implementation – including the housing market – will limit the overall stimulus effect of monetary easing.
The biggest drag on China's growth remains in the real estate sector. Beijing stepped up its efforts over the past year to curb the industry's reliance on debt for growth, which caused real estate investment and new home sales to decline in September.
"Seeing a broader and sustained slowdown in the real estate sector is probably (the) biggest downside risk we have to watch," said Francoise Huang, senior economist at Euler Hermes, a subsidiary of financial services company Allianz.
She said policymakers are trying "to phase out the most heavily indebted, illiquid or insolvent companies and in the meantime limit contagion to other sectors".
Huang doesn't expect Beijing to slow the economy so drastically that China can barely hit its 6% GDP growth target this year. Most economists expect growth of around 8% this year.
However, as policymakers focus this year on addressing longer-term issues in the economy, Beijing may not be as inclined to spur growth as it did before, she said. "Your tolerance for slowing down and your tolerance for risk may be higher than in the past."