PBOC Signals Less Appetite for Stimulus as Outlook Improves

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Is China Reaching a Make-or-Break Moment?
  • Ma Jun says central bank will pay more attention to macro risk
  • Goldman joins firms upgrading China GDP growth forecast

China’s central bank is signaling less of an appetite for expanding monetary stimulus following evidence of an acceleration in growth that has led some private economists to upgrade their forecasts.

While the People’s Bank of China hasn’t issued an official statement of a change in policy stance, the first signal of a shift came Monday in a commentary by the state news agency Xinhua. While monetary policy will maintain a certain degree of looseness in coming months, prudence will feature more prominently than last year, Xinhua said.

Late Tuesday, PBOC research bureau chief economist Ma Jun said in a briefing with local media that future policy operations, while observing the need to continue supporting growth, will also pay attention to heading off macroeconomic risks -- especially an over-expansion of corporate leverage.

The apparent shift follows data Friday that showed a pick-up in activity ranging from industrial production to fixed-asset investment in March, adding evidence that monetary and fiscal easing are having an impact. The standout data point was a surge in credit growth last month that exceeded projections of all economists surveyed by Bloomberg.

“The PBOC wants to support growth but not all the way to create a new bubble in the real estate market,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong. She said the risk is that Ma’s warning won’t prevent a bubble.

Cash Injection

Even amid the language shift, the PBOC plans to inject into the financial system the most funds in almost two months, stepping up efforts to avoid a seasonal cash squeeze. It will auction 250 billion yuan ($38.7 billion) of seven-day reverse-repurchase agreements on Wednesday, according to traders at primary dealers required to bid at the sales.

"China is now entering a growth stabilization phase," Fan Cheuk Wan, Head of Asia Investment Strategy at HSBC Private Bank in Hong Kong, said in a Bloomberg Television interview Wednesday. "Policy makers still need to take more actions in order to anchor the underlying growth momentum. At the moment, we may have seen the bottom of the growth deceleration, but how to sustain growth is a key question."

Chinese shares extended losses while other Asian markets advanced from Japan to Australia. The Shanghai Composite Index tumbled 2.3 percent at the close for the biggest retreat since February.

Less Anxious

“We expect policy support for domestic investment to become less aggressive compared with the first quarter, but still maintain a loosening bias,” Goldman Sachs Group Inc. economists including Yu Song in Beijing wrote in a note this week. “Policy makers are likely to feel less anxious about the state of growth.”

In February, the central bank changed slightly the description of its monetary policy stance to reflect a ramp-up in liquidity injections and moves to guide money market rates lower, with PBOC Governor Zhou Xiaochuan highlighting the scope for further action if needed.

Goldman this week joined other banks in boosting their gross domestic product forecasts for China, with the gain for 2016 now seen at 6.6 percent, compared with 6.4 percent previously. UBS Group AG economists on Friday boosted their 2016 forecast to 6.6 percent from a previous estimate of 6.2 percent.

“While both fiscal and credit policy support has been strong, we think such easing momentum has likely peaked,” UBS economists, led by Wang Tao in Hong Kong, wrote last week. “As new credit flow is already running at over 30 percent of GDP and CPI and property prices have picked up, we expect the credit impulse to stabilize and no longer see any interest rate cut this year.”

— With assistance by Chris Anstey

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