(Bloomberg) — China is expected to cut interest rates again this year and ramp up fiscal stimulus to fuel a faltering economy, according to economists surveyed by Bloomberg.
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The People’s Bank of China is likely to cut rates on its one-year policy loans — known as the medium-term credit facility — by 5 basis points to 2.6% in the last quarter of this year, according to the median estimate in the latest quarterly survey. It is also expected to reduce reserve requirements for banks in the coming months, the forecasts show.
On the fiscal side, economists predict that the government will introduce tax incentives for consumers and increase funding for infrastructure investment, partly through state-owned banks, such as the China Development Bank.
Beijing is under increasing pressure to boost its economy after a marked slowdown in the second quarter, which was caused by a weakening real estate market, subdued consumer spending and a slump in export demand. The central bank’s surprise rate cut in June fueled speculation of more stimulus, although China’s State Council has been slow to announce new measures.
Brian Lee, an economist at Maybank Securities Ltd., said the PBOC could wait until late Q3 or the final three months of the year before cutting rates further given Beijing’s relatively conservative growth target of around 5% and concerns about the currency.
“If interest rates are cut too quickly while the Federal Reserve and other central banks around the world are raising rates, there is a risk of further capital outflows,” he said.
The yuan has already lost more than 4% against the dollar this year, with officials recently expressing more concern about its decline.
The PBOC on Tuesday set the daily reference rate for the yuan much stronger than analysts had estimated after the currency’s plunge the day before. Wednesday’s finding matched estimates as the central bank balked at supporting the yuan, indicating it may not be ready to draw a line in the sand just yet.
Investors have become more pessimistic about China’s growth prospects after a slew of recent data showed that the economy is weakening. Consumer spending, in particular, is showing a downturn, with domestic travel spending during last week’s holiday to celebrate the dragon boat festival coming in lower than before the pandemic.
Economists surveyed by Bloomberg cut their second-quarter gross domestic product growth forecasts, though they left their full-year projections unchanged at 5.5%.
While strong data on GDP and activity in the first quarter confirmed the reopened recovery in services and consumption, activity data for April and May were disappointing on balance and show that the headwinds from the global slowdown and real estate remain severe. Arjen van Dijkhuizen, a senior economist at ABN Amro.
He predicted “piece-by-piece monetary easing and more focused support targeting vulnerabilities, including real estate.”
Of the 20 economists surveyed by Bloomberg, 18 said the government will announce more fiscal support measures this year. Twelve of them expect tax cuts or rebates for small businesses, tech companies and for green projects, while 10 predict state policy banks will increase lending or equity investments in infrastructure projects. Nine forecast an increase in the quota for local government special bonds.
“Given the financial challenges at the local government and corporate level, the central government can accelerate the issuance of special local government bonds and resume the policy banks’ special infrastructure investment fund, with more policy bank loans, to boost infrastructure investment,” said Tao Wang, UBS De Group AG’s chief economist in China, wrote in a note.
Key highlights of the survey
GDP grew by 0.8% quarter on quarter in the second quarter, compared to 1.1% in the previous survey. On an annual basis, GDP will grow at 7.5% compared to a previous survey estimate of 7.7%. Full-year GDP forecasts for this and next year remained unchanged at 5.5% and 4.9% respectively
PBOC is expected to cut the one-year medium-term rate by 5 basis points to 2.6% in the last quarter of this year
According to the survey, the seven-day reverse repurchase rate is likely to be cut by 10 basis points in the last quarter
Consumer price inflation to average 1.2% this year, lower than previous survey estimate of 1.7%. Producer prices down 2.1% for the full year, compared to a 1.4% drop in previous surveys
Exports likely to decline 1.3% in 2023, compared to previous survey forecast of 0.7% growth
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