The People’s Bank of China faces a $500 billion problem this month as it seeks to slow its stimulus to the economy, which looks to be recovering faster than expected from the coronavirus slump.

At a time when the PBOC is trying to chart a path out of coronavirus crisis measures, that leaves policy makers having to calibrate their cash injection carefully so that lenders can buttress the fiscal policy effort and roll over their debt. Too little and higher interbank rates will undermine the recovery; too much and the specter of faster debt growth rises again.

The PBOC will be “more conservative” in cutting interest rates and banks’ reserve ratios in the second half, but keep supplying short-term funds to banks, according to Ming Ming, head of fixed-income research at Citic Securities Co in Beijing. “Aggregate easing tools will be shelved, while tools directing credit to the real economy will stay.”

Much Less Stimulus

In July, PBOC pulled money from financial markets at fastest pace this year

 

Breakdown of liquidity pressures in August:

• A net 1.1 trillion yuan in central and local government bonds will be sold, according to the mean of estimates by Standard Chartered Plc, Citic Securities Co., Huachuang Securities Co., Tianfeng Securities Co., Founder Securities Co. and Everbright Securities Co.
• 550 billion yuan in medium-term loans will mature, as will 100 billion yuan in 7-day reverse repo lending and 50 billion yuan in government deposits.
• About 1.7 trillion yuan in negotiable certificates of deposit will mature, according to data compiled by Bloomberg. These are an important funding tool for medium and smaller banks.

Economists from UBS AG, Goldman Sachs Group and others have also dialed back their forecasts for interest rate cuts or other outright monetary easing measures. With the nation’s leaders calling for a more “precisely oriented” monetary policy, fiscal policy will be responsible driving the recovery in the rest of 2020.

What Bloomberg’s Economists Say..

“We are sticking to our projection for another 20 basis points of declines in the one-year Loan Prime Rate and 100 bps of cuts to banks’ reserve requirement ratio by year-end. That said, we recognize the risk that the PBOC may be more inclined to slow the pace of easing or stay on hold.”

David Qu, Economist

For the full note click here

Proactive fiscal policy needs accommodation from monetary and regulatory policy to avoid crowding out private lending, Li Zhennan, an economist at Goldman Sachs Group in Hong Kong, wrote in a report. “The PBOC needs to avoid an over-tightening that jeopardizes the growth recovery, by keeping liquidity relatively supportive to avoid further decline in bond issuance.”

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