Beijing has been much more restrained with monetary policy in the coronavirus crisis than Washington, London or Frankfurt, but that is probably about to change
By Nathaniel Taplin
Chinese job losses as exports fall could reach four million to six million, estimates one analyst.
Photo: roman pilipey/Shutterstock .
As the U.S. Federal Reserve and its European peers have pumped liquidity through the Western financial system in recent weeks, Beijing has been notably restrained. Recently, however, there have been hints of a change in tone.
On Friday, the People’s Bank of China cut the amount of cash banks must hold in reserve for the second time in less than a month, releasing an estimated 400 billion yuan for lending. That follows a Financial Times report in late March that China’s central bank is considering cutting benchmark deposit rates, which it hasn’t done since 2015.
A few days earlier, PBOC Vice Gov. Chen Yulu had noted that there was room for credit growth to run slightly higher than growth in nominal gross domestic product. The central bank’s long-stated goal has been for credit and nominal GDP to move fundamentally in line.
Keeping China’s monetary ammunition in reserve made a lot of sense when it looked like the epidemic would be primarily confined to Asia—and relatively fleeting. China’s economy was accelerating at the end of 2019 before the coronavirus hit. Sharply cutting rates to combat a one- or two-month threat would have risked reinflating housing and food-price bubbles as the economy bounced back.
But now Covid-19 has moved abroad with a vengeance. Chinese job losses as exports fall could reach four million to six million, estimates analyst Ernan Cui at consulting firm Gavekal Dragonomics—worse than the hit in 2008 and 2009. And that’s on top of the already severe damage from the coronavirus lockdowns: Surveyed urban unemployment jumped nearly a full percentage point to 6.2% in February.
Making matters worse, Chinese households are considerably more indebted than they were in 2008, meaning widespread financial troubles for the unemployed could quickly spread to banks. Household debt, which was just 56% of disposable income in 2009, was 124% in 2019, according to the Institute for Advanced Research at the Shanghai University of Finance and Economics.
The hit to domestic consumption also looks likely to persist longer than initially hoped, as fears about a secondary outbreak persist. After a tentative attempt to reopen, Beijing has ordered movie theaters closed again. And in contrast to the improving picture in manufacturing, March purchasing managers’ indexes for services were notably weak.
Images of popular tourist areas like Huangshan packed with people over the Qingming holiday weekend may not be representative of the country as a whole. Recent survey data shows that consumers remain wary.
Add in a weak housing market and cooling inflation, and the case for more aggressive monetary easing starts to look compelling. Goldman Sachsthinks growth in total finance outstanding could jump to 11.1% in March, from 10.7% in February. That would be the fastest increase since last June, although still far slower than in previous easing episodes.
Stretched balance sheets for banks and households still make a 2009- or 2015-sized lending ramp-up unlikely. But as the coronavirus crisis starts looking more like 2009, it will be increasingly difficult for China’s monetary policy makers to keep sitting on their hands. Lower rates are coming.
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