China: Building the case for additional stimulus – ABN AMRO

Arjen van Dijkhuizen, senior economist at ABN AMRO, suggests that in recent weeks, markets have seen more evidence of Beijing adding piecemeal stimulus to offset the rising drag from the trade/tech conflict with the US.

Key Quotes

“Last month, the PBoC announced a shift in their monetary toolbox, in an attempt to improve the monetary transmission mechanism and create room for lower borrowing rates. In early September, a State Council Meeting also highlighted that further support was on the cards, particularly referring to RRR cuts and to frontloading of local government debt issuance to finance specific types of infrastructure projects.”

“On 6 September, the PBoC announced it would lower bank’s reserve requirements ratios (RRRs) by another 50 bps, in line with our expectation. The central bank has now cut RRRs by a total of 150 bp this year and by 400 bps since March 2018. The PBoC also presented a 100 bp additional RRR cut for certain city commercial banks, that are lending a lot to SMEs.”

“Lending data for August indeed showed an improvement and generally came in better than expected (with M1 growth as an exception, remaining low at 3.4% yoy).”

“All in all, we expect the PBoC to continue with RRR and interest rate cuts and the fiscal authorities to create further room for local governments to step-up infrastructure spending.”