QNB Expects China to Adjust Monetary Policy to Support Growth

Doha, January 12 (QNA) - QNB's weekly commentary focused on the slowdown in the Chinese economy and what the government is doing to spur growth. The bank expects that the supportive policies of the Chinese government could place a floor under GDP growth at around 6 percent on an annual basis for 2019. The note said that Chinas aim to sustain both rapid growth and financial de-leveraging is becoming ever more challenging as weaker global growth and heightened policy uncertainty create external headwinds. In fact, softer external and domestic demand over the last year has prompted the Chinese government to gradually loose monetary and fiscal policies. The report focused on four main points that showcase China's slowing economy, and would the government is doing to address that. The first point was that lagging indicators have slowed down. Chinas GDP growth has slowed in recent quarters, from 6.8 percent in Q1 2018 to 6.5 percent in Q3 2018, the worst quarterly performance since the aftermath of the Great Financial Crisis. Another factor is that coincident indicators are pointing to another soft quarter. Growth in retail sales and online retail sales of goods and services are hovering around multi-decade or even all-time lows on a y/y basis. After two months of stagnation around the 50 level, the official manufacturing Purchasing Managers Index (PMI) figure slid to 49.4 in December 2018 to mark the first contraction in more than two years. Leading indicators are also pointing to further weakness over the coming months. New orders and new export orders, forward looking subcomponents of the PMI, were also below the 50 level. Signals for the external sector are negative. Global demand for Chinese goods is looking particularly sluggish as trade data from early-reporting key bilateral partners was also negative, reaffirming weaker export orders. South Korean and Taiwanese exports to China contracted as well (13.9 percent and 6.6 percent y/y, respectively) last month. As the two countries are major exporters of industrial inputs to Chinas export sector, this may reflect the waning of the front-loading effect in U.S.-China trade. QNB said that Chinese authorities have been attempting to pull off for much of the last two years. After a long period of debt-fueled economic growth that risks longer-term financial stability, the government has been trying to rein in excessive credit growth and cut debt levels. But policy makers do not want de-leveraging to slow GDP growth much below the 6-6.5% target. Between Q4 2016 and Q1 2018, regulatory controls aimed to limit off balance-sheet or shadow lending activity and monetary policy delivered tighter domestic liquidity. Over recent months, demand weakness has tilted the balance more towards the need to sustain economic growth. As for monetary policy, the weekly note said that the Peoples Bank of China (PBOC) has been using several policy tools to ease liquidity. After following most US Federal Reserve (Fed) rate hikes with 7-day open market operations (OMO) reverse repo rate hikes between January 2017 and March 2018, the Peoples Bank of China (PBOC) has been standing pat despite three additional Fed rate hikes. The PBOCs net injection of funds through OMOs has contributed to loosen the 7-day interbank pledged repo average interest rate in recent months. Moreover, reserve requirement ratios (RRR) to banks, an important instrument to manage the money supply, were lowered by 350 basis points since March 2018, including the most recent action on January 4th 2019. This added to the PBOCs December 2018 decision to create a new Targeted Medium Term Lending Facility (TMLF). With lower rates and longer maturity than other facilities, the TMLF will provide banks with additional funding to ramp up credit to the private sector, especially to small and medium enterprises. (QNA)