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China is moving to Spur lending as inflation fears ease

HONG KONG – China said on Friday it would release more liquidity in the financial system as inflation concerns showed signs of opening, replaced by concerns that the recovery will slow down faster than expected.

On Friday, China’s central bank said it would lower the amount it will set aside and effectively free up $ 154 billion (1 trillion yuan) that banks can lend. The People’s Bank of China’s decision to cut the reserve requirement by 0.5 percentage points, though not surprisingly, marks the first action since April last year, when Beijing took a similar step near the peak of the Covid-19 pandemic impact. on the economy.

The new liquidity signaled by China’s central bank indicates that Beijing may be about to support the economy following a sharp write-down of credit earlier this year. The turn to loosen, albeit limited, puts China on a different wavelength than the Federal Reserve and central banks in other developed economies, which have begun to discuss adjusting their relief policies amid rising inflationary pressures.

Although it did not explicitly require banks to lend to smaller companies, the central bank said on Friday that it was largely loosening the reserve quota to help China̵

7;s smaller companies, which are generally thought to hurt more than their larger counterparts – especially the domestic one. consumption remains sluggish.

China’s cabinet, the Prime Minister, had signaled that the reserve quota was cut on Wednesday, citing the negative impact of rising commodity prices on small businesses, although it stressed that decision-makers should avoid “flood-like” stimulus.

China’s move to increase liquidity came hours after the release of fresh economic data showing inflation moderating a touch, giving politicians more room to support the recovery as it shows some signs of losing steam.

Fresh economic data showed moderate inflation. a popular shopping street in Beijing on Thursday.


Andy Wong / Associated Press

On Friday, China’s National Bureau of Statistics reported that the country’s producer price index rose 8.8% in June from a year earlier, a slightly slower pace than maize year-over-year increase of 9.0%, the highest level in more than a decade . It was the first time the number fell from the previous month since last October.

The modest slowdown in inflation was largely driven by a slower rise in global metal prices and Beijing’s recent efforts to tame domestic commodity collections, the Bureau of Statistics said.

Constraints in the supply chain and production bottlenecks, which have driven inflationary pressures largely this year, are also likely to peak as manufacturing begins to catch up with demand, according to HSBC economists.


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In the meantime, consumer price inflation rose by 1.1% in June from the previous year, slightly lower than economists ‘expectation of an increase of 1.2% and well below the authorities’ target at the end of the year of 3%. In addition to giving policymakers more room to loosen monetary policy, low consumer inflation figures underscore the need to stimulate the economy, as domestic consumer sentiment remains weak more than a year after the Covid-19 pandemic was largely brought under control within China’s borders . .

In particular, the reduction of the reserve ratio “indicates that prudent monetary policy is tending towards a loosening, although this does not mean that monetary policy tends to be significantly loose,” said Lian Ping, a Beijing-based economist at the Zhixin Investment Research Institute.

After several weeks in which rising commodity prices increased the operating costs of Chinese companies, especially smaller companies, Beijing faced an urgent need to lower financing costs, said Mr. Lian, who believes central bankers will be forced to cut the reserve quota again in the third quarter to support the slowing economy.

Despite the slowdown in price increases, Beijing seems to be worried about the short-term cost pressures on Chinese producers as well as the unbalanced nature of the long-term recovery.

Prices of metals such as copper and aluminum remain significantly higher than pre-pandemic levels despite the government’s recent market interventions. The increased input costs could slow production for Chinese producers and suppress investment and increase pressure on the economy, said Ting Lu, China’s chief economist at Nomura.

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Separately, China’s export engine, which has been a key pillar in the country’s rapid economic recovery, is unlikely to maintain its heroism in the coming months, according to economists.

Although the expansion of the southern Chinese port of Yantian appears to be easing, hangovers from the pandemic-induced chaos in a port that handles 7% of the country’s maritime transport have offset China’s exports.

Morgan Stanley economists now expect Chinese exports to soften in June to a 19.5% increase from the previous year compared to the 28% corn jump. Chinese export figures are expected to be released next week.

Higher vaccination rates and the abolition of lockdowns in many Western countries are expected to increase consumer spending on services such as travel and dining, as they spend less on physical goods, which is likely to weaken demand for products made by China.

The reduction in the reserve quota, which takes effect on July 15, will apply to all banks in China except some smaller lenders in rural areas and will reduce annual financing costs by the equivalent of $ 2 billion.

Separate credit data released by the central bank on Friday showed that new loans issued by Chinese banks rose sharply in June to $ 327 billion (2.12 trillion yuan) – significantly higher than corn trillion yuan and economists’ forecast of 1.8 trillion yuan .

A broader credit target, including funding offered by non-banking institutions, meanwhile almost doubled in June from the previous month to around € 566bn. $ (3.67 trillion yuan). The money supply also expanded at a faster pace than expected.

Write to Stella Yifan Xie at stella.xie@wsj.com

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