China’s State Council has promised to lower the reserve requirement ratio (RRR) at the right time for banks to offer more loans to small-and-medium-sized enterprises in a bid to stimulate the local economy.
Chinese Premier Li Keqiang said in a State Council executive meeting on Wednesday that the government would launch supportive measures to counter the impact of Covid-19 and boost the recovery and growth of consumption. Li said consumption in the service sectors should be propelled, while spending on automobiles and home appliances should be encouraged.
Economists said the coming monetary easing would help alleviate corporates’ funding pressure amid the recent lockdown in Shanghai and Guangzhou, caused by the Omicron outbreak.
However, they said the People’s Bank of China (PBoC) would remain cautious in terms of interest rate cuts, which would put strong depreciation pressure on the renminbi amid the coming rate hikes in the United States this year.
In early March, large-scale virus outbreaks were reported in northeastern China’s Jilin province. As of Tuesday, more than 60,000 cases were recorded in the province. Other cities including Shanghai and Shenzhen also reported positive cases in mid-March.
Since March 28, Shanghai has been locked down, but the number of infections kept rising. Guangzhou, a hub for manufacturers and exporters, was locked down from Monday.
The impact of lockdown measures in March on the Chinese economy has remained unclear as the National Bureau of Statistics will announce the gross domestic product (GDP) figures for the first-quarter next Monday.
China’s total value of imports and exports of goods in the first quarter of this year rose 10.7% year-on-year to 9.42 trillion yuan (US$1.48 trillion), the General Administration of Customs said Wednesday.
In the first quarter of 2021, the growth rate was 21.4% due to a low base in the same period of 2020 when China was hit by the first epidemic wave that originated from Wuhan in Hubei province.
In the first three months of this year, China’s exports grew 13.4% year-on-year, while imports increased 7.5%, thanks to the increase in trade with ASEAN, the European Union, the United States, South Korea and Japan.
The export of solar cells, lithium batteries and automobiles increased by 100.8%, 53.7% and 83.4%, respectively. The export of labor-intensive products surged 10.9%.
“China’s foreign trade started steadily in the first quarter of this year, laying a good foundation for achieving the annual target,” said Li Kuiwen, spokesman of the General Administration of Customs.
“However, we should see that some unexpected factors in the current international and domestic environment exceed expectations, the external environment of foreign trade is becoming more and more severe and complex, and the development is facing many risks and challenges.”
Li added that China had to make greater efforts to achieve the goal of stabilizing its external trade due to the higher base last year.
In a State Council executive meeting on Wednesday, Premier Li urged stimulating the Chinese economy by supporting exporters with tax rebates, encouraging domestic consumption and relaxing monetary policies.
China would increase export tax rebates to promote foreign trade development, while the business environment for foreign trade would be improved on multiple fronts, Li said. Enterprises with better credit records would enjoy greater facilitation in customs clearance and tax refunds, he said, noting that malpractice such as false exports and fraudulent tax rebates would be punished to the full extent of the law.
“Consumption is a steady driver of economic growth and bears on ensuring and improving people’s livelihoods,” he said.
New types of consumption should be promoted and the integration of online and offline consumption should be accelerated, Li said. Consumption in key areas should be expanded, while consumption in the service sectors, such as medical, health, elderly and child care, should be propelled, he added.
Major banks are encouraged to lower their provision coverage ratio in an orderly manner, Li said. The meeting also decided to use monetary policy tools like RRR cuts at an appropriate time to increase the credit input capacity of banks, strengthening financial support to virus-hit sectors, micro, small and medium-sized enterprises and self-employed individuals.
The recent Covid-19 resurgence will affect China’s exports in four ways, including the disruption in logistics, the slower production of exporters, a shortage of raw materials and a transfer of orders to other countries, Zheng Yuchi, an economist at China International Capital Corp, wrote in a research report.
“As Covid-19 conditions increase the uncertainty of supply in the Chinese mainland, some orders may shift to other countries,” Zheng said. “However, this will be mainly confined to labor-intensive products.
“If Covid-19 conditions are effectively contained, the short term negative impact on exports will be mainly reflected in March and April, dragging year-on-year growth by about 2 and 4 percentage points, respectively,” Zheng said, adding that China’s exports would probably grow 14.4% in March and 4.5% in April.
“For a long time, the market has been calling for the PBoC to conduct laxer monetary policy to support the economy,” said Alicia García-Herrero, Chief Economist for Asia Pacific at Natixis. “The current Omicron outbreak and geopolitical uncertainties clearly justify further easing.
“But while we have seen the PBoC’s earlier move to cut RRR and interest rates and more recent actions to expand bank’s lending, the PBoC’s monetary policy stance seemed less strong than expected as it avoided further rate cuts during March,” added García-Herrero.
She said the government’s fiscal stance, as specified during the two sessions, should be more expansionary for 2022, basically leaving more room for the PBoC to slow the easing pace.
Besides, she said the yield differentials between China and the US had been narrowing with the 10-year yield differential having reverted for the first time since 2010. She said the large portfolio inflows into China had also turned into outflows as the Fed was starting to hike rates, while Chinese assets were perceived as riskier in the current economic downturn.
She added that such a trend could put strong depreciation pressure on the Chinese currency.
Joseph Yam, former chief executive of the Hong Kong Monetary Authority, told a forum on Tuesday that he did not see a risk of a sudden yuan depreciation caused by the virus outbreaks in mainland China and the rising geopolitical risks in the world.
Yam said he was not worried that China would face a large-scale capital outflow as the country still had capital controls.
Yam said if there was a correction in renminbi, many investors would buy and support the currency. However, he pointed out that China should accelerate its renminbi internationalization, which has been slowed recently, to reduce its reliance on the use of the US dollar over the long term.
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