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4 Minute Read by (Reuters) – LONDON (Reuters) – China’s move on Friday to inject 1 trillion yuan ($154 billion) into its economy served as a reminder to investors that even the greatest economies will need a boost from time to time while the coronavirus outbreak continues. The People’s Bank of China (PBOC), the country’s central bank, is seen in Beijing, China, on September 28, 2018. Jason Lee/Jason Lee/Jason Lee/Jason Lee/Jason Lee/Jason Lee/Jason The People’s Bank of China (PBOC) decreased its reserve requirement ratio (RRR) – the amount of money banks must keep at the central bank for safety – by 50 basis points on Friday night, in one of its signature acts (bps). It’s the first time something like this has been done since COVID was rapidly spreading over the world in April of last year. Moreover, it marks the conclusion of nine months of incremental policy tightening by policymakers keen to keep credit growth under control. “In light of the recent growth hiccup with Covid rebound, supply chain problems, and further deceleration in domestic consumption,” Morgan Stanley analysts added, “we believe this represents a change from countercyclical tightening to an easing bias.” The change, according to Manik Narain, head of emerging market strategy at UBS, was a fine-tuning rather than a complete U-turn by the PBOC. Around 400 billion yuan of the RRR’s anticipated value of 1 trillion yuan is expected to be used to repay existing PBOC ‘Medium-term Lending Facility’ funds, while 700-750 billion in tax payments are due soon. However, from a broader viewpoint, it served as a stark warning that reducing COVID support measures isn’t going to be easy for anyone. “With COVID policy support, China was first in, first out,” Narain remarked. “So, if you’re looking for a global message, it’s plausible that the PBOC is demonstrating that economies are fairly fragile and that inflation is unlikely to be particularly destructive in the medium term.” (Graph: RRR movement in China, ) The PBOC’s move comes as global COVID cases are rapidly re-accelerating. At the same time, the US Federal Reserve is debating whether or not to taper its asset purchases and near-zero interest rates implemented last year, and emerging market giants such as Brazil, Mexico, and Russia are already raising interest rates to combat inflationary pressures. The bond market appears to be pricing in lower interest rates over the medium term in response to China’s rate cycle turning. Even before the RRR announcement, rumors that a cut was on the way caused China’s 10-year government bond yield to fall for the first time this year. Many China analysts predict that pent-up COVID demand has peaked, and that growth rates will now drop, owing to weaker exports, rising producer price inflation, and Beijing’s continuous property market repression. However, the economy is anticipated to grow by more than 8% this year, exceeding the government’s moderate growth objective of over 6%, indicating that there is no pressing need to accelerate easing. “We expect fiscal policy to remain focused on the pandemic’s most vulnerable sectors, such as small businesses. We also expect the property market’s macroprudential tightening to continue “According to Gustavo Medeiros, Ashmore Group’s deputy head of research. Another takeaway from Friday’s decision, according to UBS’s Narain, is that other major developing countries would likely perceive it as a foreshadowing of things to come in their own economies. “If I’m the governor of the central bank in Mexico or Brazil, and I’ve already raised rates, that tells me that the (interest rate) hike cycle is likely to be short.” (Graph: Total Social Financing in China, ) Karin Strohecker contributed an additional graphic, and Mark Potter edited the piece./nRead More

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