PBoC September Preview: Will policymakers step in to ease Evergrande fears?

The People’s Bank of China (PBoC) will announce its monetary policy decision on Wednesday, September 22, at 0130 GMT. With the Chinese economy showing signs of a slowdown and the Evergrande financial crisis weighing heavily on global risk sentiment, investors hope for policymakers to step in and address those issues.

Chinese economy on the back foot

Earlier in the month, the data from China showed that the economic activity in the manufacturing sector contracted for the first time since May 2020, with the Caixin PMI dropping to 49.2 in August. Similarly, the Caixin Services PMI fell to its lowest level in 17 months at 46.7 in the same period. 

Additionally, the National Bureau of Statistics of China reported that Retail Sales in August rose by 2.5% on a yearly basis, missing the market expectation for an increase of 7% by a wide margin.

On top of disappointing macroeconomic data releases, fears over Evergrande Group, China's second-biggest property developer, defaulting reminded investors of a potential global market crisis. According to Reuters, Evergrande is facing over $300 billion in liabilities and has an $83.5 million interest rate payment on its March 2-22 bonds and a $42.5 million payment on September 29 on its March 2024 notes. In case the real-estate giant fails to settle the interest within 30 days of the scheduled payment dates, both bonds will default.

Experts are concerned about the Evergrande crisis spilling over to financial institutions, triggering a domino effect and creating global systemic risks. Reflecting this sentiment, safe-haven flows dominated the financial markets at the start of the week. The S&P 500 Index lost more than 2% on Monday and the benchmark 10-year US Treasury bond yield fell nearly 5%.

Eyes on PBoC

Back in August, the PBoC urged Evergrande to reduce its debt risks and several media outlets reported that regulators approved a proposal to renegotiate payment deadlines. Although Fitch Ratings said in a recently published report that the overall negative impact on China's banking sector would be manageable in case Evergrande were to default, the PBoC could take action to relieve some of the pressure.

Another 50 bps reduction to the PBoC's reserve requirement ratio (RRR), which was expected to come before the end of the year following July's unexpected 50 bps cut, to ramp up the liquidity could be in the books at this week's policy meeting.  

While speaking at a news conference on September 7, Pan Gongsheng, vice governor at the PBoC, reiterated that China will not resort to "flood-like" stimulus. However, the case for a pre-emptive rate cut to counter a potential slowdown in corporate investments has strengthened and the PBoC could opt out to adopt a dovish tone. 

If the PBoC manages to convince investors that they will do what it takes to not let the Evergrande crisis turn into a global turmoil, risk flows are likely to return to markets. In the meantime, the US Federal Reserve could see this development as a reason to take a step back and assess the global economic situation before starting to reduce its asset purchases, possibly triggering a rally in Wall Street's main indexes.