[BEIJING] Angst inside China’s halls of power over a massive stock rally risks delaying another major round of monetary stimulus, pushing the central bank further to the sidelines as Beijing tries to keep economic growth on track.
Concerns that easy money is behind a surprise bull run in equities have prodded regulators into considering moves to avoid a repeat of the 2015 crash that wiped out US$6.8 trillion in market capitalisation. The People’s Bank of China (PBOC) may be next in trying to put some of those fears to rest.
While many economists still forecast a small interest-rate cut before the end of the year, global banks such as Citigroup and Nomura Holdings are warning the PBOC may now wait before taking action that could effectively inject more liquidity into the market with steps such as lowering borrowing costs or reducing the amount of money lenders must set aside in reserves.
“The stock rally will reinforce policymakers’ inclination to refrain from broad monetary policy stimulus,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “China is mainly relying on fiscal stimulus for growth support, with monetary policy playing second fiddle.”
The PBOC has already had to negotiate an obstacle course of competing priorities to help an economy caught in a second trade war with the US. Mindful of risks such as downward pressure on the yuan and record-low profit margins at lenders, officials have so far delivered a single 10 basis-point rate cut in May, alongside a trim to the reserve requirement ratio (RRR) by half a percentage point at the same time.
As tensions still abound between the US and China over tariffs and economic growth set to slow in the coming months, analysts polled by Bloomberg in late August forecast a 10-basis point cut to the policy rate and a 50-basis point reduction in the RRR in the fourth quarter.
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Back in December, some Wall Street banks had projected the biggest rate cuts in a decade this year with cumulative easing of at least 40 basis points.
While policymakers have elevated the role of equities and property in lifting confidence, their goal is to nurture the stock market as a reliable source of profit for households and funding for Beijing’s tech ambitions.
That’s why the rapid US$1.3 trillion stock rally in August has left officials on edge.
“Liquidity could be the primary factor driving the ongoing rally of China equities,” said Yu Xiangrong, head of Greater China economics at Citi. “There is no need to fuel the rally further at this stage.”
Even though stocks only account for a fraction of household wealth, a long run of their steady gains could draw more people into the market, helping stabilise public confidence and creating another stream of income at a time when jobs prospects dim.
It’s the rationale that informs how policymakers act today, and why they will tread carefully to steer clear of making the same mistakes as a decade ago.
Back then, the government actively promoted stocks and encouraged speculative bets, while regulators made it easier for people to open up equities accounts and reduced trading fees.
In the six months leading up to the market’s peak in June 2015, the PBOC twice cut the one-year benchmark lending rate as well as the RRR. While intended to help an economy struggling to overcome a cooling property market and slower growth, the moves also boosted liquidity and facilitated a surge in borrowing among investors.
In the end, authorities triggered a meltdown after trying to halt a rally they deemed excessive. Drawing on the experience, analysts see a clear parallel to today’s stock boom, which Nomura’s chief China economist Lu Ting believes has the potential of leading to irrational exuberance and a bubble.
“If the rally goes too fast and risks a repeat of 2015, the PBOC will likely delay easing,” said Michelle Lam, Greater China economist at Societe Generale. BLOOMBERG