PBOC May Need To Boost Chinese Economy As ‘Stagflation’ Risk Rises


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Liu Shijin, a member of the People’s Bank of China monetary policy committee, said in an online forum on Sunday that the world’s second-largest economy may face “near stagflation” for the remainder of this year and through. in 2022, if demand continues to struggle and the cost of goods leaving Chinese factories remains high.

“We need to pay attention to it, because if it happens, it will affect not only the fourth quarter, but also next year,” Liu said.

Stagflation – when inflation is high but economic growth slows – can be problematic because policies aimed at curbing inflation, such as higher interest rates, are likely to dampen growth even more. Policies aimed at stimulating growth risk pushing prices further upwards.

Even with his warning, Liu still expects the economy to meet China’s growth target of over 6% for the year.

Risks to the Chinese economy have accumulated in recent months. Along with soaring producer price inflation in factories around the world, the country is also grappling with a severe energy crisis and a big slowdown in real estate.

Chinese Premier Li Keqiang recently acknowledged these concerns, telling a seminar in Beijing last week that the economy was facing “further downward pressure.” He called the recent Covid-19 outbreaks, severe flooding, rising commodity prices and energy shortages as major concerns.

Li also said policymakers should focus on helping “market players,” including manufacturing companies and small businesses, by offering tax cuts or reductions in administrative costs.

“Fear of slower growth is clearly increasing among technocrats in different government agencies,” wrote Larry Hu, head of the Chinese economy at Macquarie Group, in a report on Sunday.

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Analysts also suspect that Chinese policymakers may consider cutting interest rates or taking other steps to ease monetary policy. A quarterly report released by the central bank on Friday omitted phrases that previously appeared to signal stricter policies.

Deleting those phrases suggests a change on the horizon, according to analysts at Goldman Sachs, Nomura and Citi.

“In our view, these cuts represent an official change in PBoC policy and set the stage for more decisive monetary and credit easing,” Nomura analysts wrote in a Sunday report.

These changes are not happening yet. On Monday, the central bank kept the Loan Prime Rate – a benchmark rate banks charge corporate clients for new loans – unchanged for November, the 19th month in a row.

But Capital Economics analysts believe it won’t be long before the central bank starts cutting key rates.

“As economic tensions continue to grow, there will be more pressure to ease funding tensions from indebted borrowers,” Julian Evans-Pritchard, senior Chinese economist for the company, wrote in a report Monday. He added that Capital Economists believe the central bank will start cutting rates before the end of 2021, “followed by further cuts in 2022.”

Others expect the central bank to explore other options. Rather than changing interest rates, Goldman Sachs analysts said they expected more targeted support for green development and small and medium-sized businesses.

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