Investors to PBoC: Can we have some more?
Hours after China unleashed a fresh bout of monetary stimulus in a fresh bid to stabilize the country's unruly equity market and quell concerns around an economic slowdown, investors are already looking for more aggressive action from authorities.
"The PBoC has come across hesitant and reactive. Policy easing has followed rather than pre-empted the pullback in the economy as well as asset markets," said Vishnu Varathan, senior economist at Mizuho Bank.
The People's Bank of China (PBoC) late Tuesday cut both the benchmark lending and deposit rates by 25 basis points to 4.6 percent and 1.75 percent, respectively. It also slashed the reserve requirement ratio (RRR) by 50 basis points to 18 percent for most big banks – in a move that's expected to release an estimated 750 billion yuan of liquidity into the market.
The announcement came on the heels of another dismal session in Chinese stocks, which tumbled 7.6 percent on Tuesday – following Monday's 8.5 percent plunge – sending the market to an eight-month low.
"[The] absence of coordinated policy stimulus comprising monetary easing, fiscal boost and property/asset market [measures] mean that relief remains flimsy as lagging and seemingly ad-hoc policy are assessed piecemeal," Varathan said. "The PBoC has its work cut out in stabilizing markets more durably," he said.
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U.S. stocks, which had reacted positively to the announcement initially, staged a reversal to end the session lower. The and the S&P 500 closed about 1.3 percent lower after rallying nearly 3 percent earlier, their biggest reversal to the downside since Oct. 29, 2008.
"We will know more today, but it seems that in the last hour of U.S. trading, markets have assessed it and decided that the policy isn't enough," said Emma Lawson, senior currency strategist at National Australia Bank. The benchmark swung between losses and gains in a choppy trading session on Wednesday. It closed down 1.3 percent.
More stimulus in the pipeline
Yu Song, economist at Goldman Sachs, said that while the latest monetary easing is a much need move to support the economy and market, he agrees it is unlikely to be sufficient.
His baseline forecast is for another 100 basis points in RRR cuts by the year end – most likely in two moves. The timings of the cuts will be data and market dependent, he said.
"Further benchmark interest rate cuts are relatively less likely compared with further RRR cuts, in our view, given policy makers' residual worry over inflation and concerns on FX outflows, though we still have another 25bp cut in our baseline," he said.
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Besides monetary policy, Goldman also expects authorities will also step up fiscal support financed through local government bond issuances, better utilization of idle fiscal deposits and more support to the policy banks. China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China, the so-called policy banks, have a different remit from state-owned commercial banks as they focus on providing long-term financing for key projects supported by Beijing.
Goldman wasn't alone in its predictions for further stimulus. ANZ economists Liu Li-Gang and Louis Lam also believe another RRR cut is on the cards amid weak demand in the economy.
"The PPI [producer price index] has remained in negative territories for 41 consecutive months, indicating that China's deflationary pressures remain strong," they said.
"In order to fend off deflation and maintain GDP [gross domestic product] growth at the target of around 7%, China will likely engage in further easing measures including another RRR cut of 50bps in the fourth quarter and additional targeted measures."