# Analysis-China central bank, under pressure to ease, is hemmed-in by inflation, Fed jitters
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-17
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: China's Central Bank Set to Take Easing Steps Amid
Meta Description: Analysts expect benchmark lending rate cuts as China's economy slows, but central bank seeks balance to avoid inflation and capital flight.
URL: https://financedigest.com/analysis-china-central-bank-under-pressure-to-ease-is-hemmed-in-by-inflation-fed-jittershtml

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By Kevin Yao

BEIJING (Reuters) – China’s central bank is set to take more easing steps, pressured by a shaky economy that is undercutting jobs, but it faces limited room to manoeuvre due to worries over rising inflation and capital flight, policy insiders and analysts said.

Analysts now expect cuts in the country’s benchmark lending rates as early as Monday, after the People’s Bank of China (PBOC) unexpectedly lowered two key rates this week as data showed the economy unexpectedly slowed in July.

But the PBOC is walking a tightrope — seeking to support the COVID-ravaged economy while avoiding massive stimulus that could add to inflationary [pressures and risk outflows from China’s struggling stock and bond](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold") markets, as the U.S. Federal Reserve, and other economies, aggressively [raise interest rates](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll").

China’s economy narrowly avoided [contracting in the second quarter](https://www.financedigest.com/german-gdp-contracted-by-0-4-in-the-fourth-quarter.html "German GDP contracted by 0.4% in the fourth quarter") amid widespread lockdowns and a deepening property crisis, which have badly damaged consumer and business confidence, and COVID cases have rebounded again in recent weeks. Nomura estimates 22 cities are currently in full or partial lockdowns, making up 8.8% of GDP.

Currently, the main problem that China faces is slowing [economic growth](https://www.financedigest.com/different-employee-engagement-outcomes-for-u-s-and-canadian-companies-amidst-continued-economic-growth-pressures.html "DIFFERENT EMPLOYEE ENGAGEMENT OUTCOMES FOR U.S. AND CANADIAN COMPANIES AMIDST CONTINUED ECONOMIC GROWTH Pressures"), safeguarding growth is the top priority,” Yu Yongding, an influential government economist who previously advised the PBOC, told Reuters.

What we should do is to continue to adopt expansionary fiscal and monetary policy, including cutting [interest rates,”](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies") he said.

[China is likely to cut](https://www.financedigest.com/lighting-maker-signify-cuts-2022-outlook-again-on-china-business-lighting.html "Lighting maker Signify cuts 2022 outlook again on China, business lighting") its benchmark lending rate for companies and home buyers, known as the loan prime rate (LPR), at its next setting on Aug. 22, policy insiders and analysts said.

Shortly before weak data was released on Monday, the PBOC unexpectedly cut the rate on its medium-term lending facility (MLF) for the [second time this year](https://www.financedigest.com/ericssons-board-rebuked-by-shareholders-at-agm-for-second-year-in-a-row.html "Ericsson’s board rebuked by shareholders at AGM for second year in a row"), by 10 basis points. It also [cut its reverse repo rate](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") by the same margin. Both were already at record lows.

The [rate cut is not enough – we should step up easing,”](https://www.financedigest.com/oil-falls-as-earthquake-impact-on-crude-eases-rate-hike-fears-rise.html "Oil falls as earthquake impact on crude eases, rate hike fears rise") said a government adviser who spoke on condition of anonymity.

However, the [central bank](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") is unlikely to cut banks’ reserve requirement ratio (RRR), a traditional tool to boost liquidity, any time soon, given the financial system is already awash with cash, China watchers said.

The [central bank](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") already has slashed the average RRR level to 8.1% from 14.9% in early 2018, pumping a staggering 9 trillion yuan ($1.33 trillion) into the economy.

The PBOC may instead use structural policy tools, such as low-cost loans, to give targeted [support to ailing small firms and sectors favoured by state](https://www.financedigest.com/u-s-state-officials-urge-support-for-landmark-26-billion-opioid-settlement.html "U.S. state officials urge support for landmark  billion opioid settlement") policies, they said.

The sputtering of the [world’s second-largest economy](https://www.financedigest.com/biggest-economy-in-the-world.html "Biggest Economy in the World") comes at an inopportune moment for President Xi Jinping, who is poised to secure a precedent-breaking third leadership term at a once-in-five-years congress of the Communist Party later this year.

Of particular concern, youth unemployment has remained stubbornly high, reaching a record 19.9% in July, while the nationwide survey-based [jobless rate](https://www.financedigest.com/italy-jan-jobless-rate-edges-up-to-7-9-with-35000-jobs-created.html "Italy Jan jobless rate edges up to 7.9%, with 35,000 jobs created") has eased slightly but remains elevated at 5.4%.

On Tuesday, Premier Li Keqiang said that Beijing will step up policy support for the [economy](https://www.financedigest.com/china-steps-up-easing-cuts-lending-benchmarks-to-revive-faltering-economy.html "China steps up easing, cuts lending benchmarks to revive faltering economy") and take more steps to spur consumption and investment.

Even then, some analysts said modest [rate cuts](https://www.financedigest.com/stocks-struggle-as-china-rate-cut-sends-oil-tumbling.html "Stocks struggle as China rate cut sends oil tumbling") may only help at the margin if companies and consumers remain wary of taking on more debt. New [bank lending in China](https://www.financedigest.com/credit-agricole-launches-china-ma-and-investment-banking-business.html "Credit Agricole launches China M&A and investment banking business") in July fell more than expected and was less than a quarter of the level in June.

SHAKY RECOVERY

China’s leaders have recently downplayed the necessity of hitting the government’s [annual growth](https://www.financedigest.com/mena-infant-milk-formula-market-to-record-exponential-compound-annual-growth-rate-in-the-coming-years.html "Mena Infant Milk Formula Market to Record Exponential Compound Annual Growth Rate in the Coming Years") target of “around” 5.5%, which was widely seen as out of reach.

With no sign that the government is easing its tough “zero-COVID” policy, some private economists expect the economy to grow by about 3% this year, which would be the slowest since 1976 excluding the 2.2% expansion in 2020, during the [initial COVID](https://www.financedigest.com/fda-advisers-back-the-same-covid-vaccine-for-initial-shots-boosters.html "FDA advisers back the same COVID vaccine for initial shots, boosters") outbreak.

But while Chinese policymakers may quietly accept lower growth without publicly revising the target, they have stressed they still want to achieve the “best possible results”, counting on fiscal policy measures — particularly infrastructure spending — to spur [activity in a politically sensitive year](https://www.financedigest.com/the-next-10-years-to-look-through-organic-concentration-of-the-automotive-active-grille-shutter-market-at-a-cagr-of-7-8.html "The next 10 years to look through organic concentration of the Automotive Active Grille Shutter Market at a CAGR of 7.8%"), policy insiders said.

Monetary policy will be relatively loose to support growth, but the room will be limited,” Xu Hongcai, deputy director of the economic policy commission at the state-backed [China](https://www.financedigest.com/analysis-trapped-cash-mangles-chinas-policy-plans.html "Analysis-Trapped cash mangles China’s policy plans") Association of Policy Science, told Reuters.

[INFLATION WORRIES](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries")

Meanwhile, signs of consumer [inflation pressures – long benign in China](https://www.financedigest.com/oil-rises-about-2-with-u-s-and-china-inflation-in-focus.html "Oil rises about 2% with U.S. and China inflation in focus") – are beginning to emerge.

The July [consumer price](https://www.financedigest.com/investors-warn-big-consumer-firms-over-price-hikes-as-competitors-gain.html "Investors warn big consumer firms over price hikes as competitors gain") index (CPI) increased 2.7% from a year earlier, the fastest pace since July 2020, even as activity cooled. While CPI is still within the official comfort zone, the central [bank has recently forecast that price rises](https://www.financedigest.com/the-rise-of-biometric-technology-in-banking.html "The rise of biometric technology in banking") may breach the official threshold of 3% in coming months and warned against complacency.

In its second-quarter policy implementation report published last week, the PBOC said China should [learn a lesson from the “misjudgment” of Western central banks](https://www.financedigest.com/learning-the-lessons-of-the-bangladesh-bank-heist.html "LEARNING THE LESSONS OF THE BANGLADESH BANK HEIST") on soaring inflation.

In the short term, China’s structural [inflation pressure](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure") may increase, import inflation pressure still exists, and the price rise may rebound in stages due to multiple factors. We should not take it lightly,” the [central bank](https://www.financedigest.com/central-banks-hike-rates-again-but-a-pause-is-coming.html "Central banks hike rates again, but a pause is coming") said.

Still, most economists don’t believe [inflation is creating a big](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") headache for policymakers for now, given weak demand.

Although we face [rising inflation](https://www.financedigest.com/shares-rise-but-concern-mounts-over-inflation-flare-up.html "Shares rise, but concern mounts over inflation flare-up") due to internal and external factors, this is not the main danger,” Yu said.

($1 = 6.7745 Chinese yuan renminbi)

(Reporting by Kevin Yao; Editing by Kim Coghill)


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