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As economic recovery falters, China adopts a fresh policy of ‘proactive easing’ to open a new chapter

China opens a new era of 'proactive easing' as the economic recovery turns sour

China opens a new era of ‘proactive easing’ as the economic recovery turns sour

China’s central bank has made its first cut in nine months, lowering the seven-day reverse repurchase rate from 2% to 1.9% as China’s Covid-19 reopening stalls, resulting in a lack of moment and disappointing data. Economists view the move as a signal of more monetary easing to come. After the announcement, China’s sovereign bonds increased in price and the yuan fell to its weakest levels since November. Researchers predict that policymakers will further ease monetary policy, however, some argue that more significant measures are necessary. Barclays economists anticipate cuts to the medium-term lending facility rate, as well as the loan prime rate and mortgage rates up to 80bp. Conversely, SocGen economists believe much more easing is needed, with fiscal backed central government funding being a more suitable option.

FAQs

What is China’s seven-day reverse repurchase rate?
The seven-day reverse repurchase rate is the rate at which the People’s Bank of China lends money to financial institutions for seven days. This rate is a key tool used for implementing monetary policy in China.

What is monetary easing?
Monetary easing refers to a central bank’s policies designed to increase the money supply and improve overall economic activity. This can include decreasing interest rates, increasing lending and investment, and reducing reserve ratios for banks.

What is China’s Politburo?
China’s Politburo is the top decision-making body of the Chinese Communist Party (CCP). It is composed of 25 members who are responsible for determining the direction of China’s political, social, and economic policies.

What is the reserve requirement ratio?
The reserve requirement ratio (RRR) refers to the amount of money that banks must hold in their coffers as a proportion of their total deposits. The RRR is a tool used by central banks to regulate the amount of money that is available for lending. When the RRR is lowered, banks are able to lend more money, which helps to stimulate economic activity.

China opens a new era of 'proactive easing' as the economic recovery turns sour
China opens a new era of ‘proactive easing’ as the economic recovery turns sour

As economic recovery falters, China initiates a new phase of ‘proactive easing’

China’s central bank cut its seven-day reverse repurchase rate from 2% to 1.9% on Tuesday in what economists are viewing as the beginning of a new era of monetary policy. As the economy loses momentum and hard data disappoints, top China economists at Wall Street banks see the move as the starting gun for more easing to come. Analysts predict that the People’s Bank of China will continue its monetary easing cycle with 30 basis point cuts, 50 basis point RRR cuts, and 60-80 basis point mortgage rate cuts in total over the next nine months. However, it may not be enough as analysts such as Societe Generale economists suggest that “much more easing is needed, particularly fiscal backed by central gov funding.”

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