China opens door to more monetary easing actions ahead

The policy has taken a more dovish tilt in China, aimed at "economic stability". China’s cut of two key policy interest rates opens the door to more monetary easing actions ahead. This is despite the sentiment that the Federal Reserve will probably hike rates from March.

On Monday, China cut the one-year medium-term lending facility rate and the seven-day reverse repurchase rate for the first time in almost two years. The one-year tenor was already dropped by five basis points last month, so all eyes are on whether the five-year rate will decline to allow for cheaper mortgages.

''We expect at least another 10bp easing in the LPR this quarter, alongside another 50bp cut in the RRR,'' analysts at TD Securities said. ''However, we don’t think the authorities will rush to ease given signs of stability in the property sector.''

Goldman Sachs Group Inc. economists led by Maggie Wei said, “we see a decent possibility for the five-year loan prime rate to be cut by 5 basis points” when it’s announced Thursday, the economists said in a note Monday. The five-year rate is the reference for mortgages and a cut “would send a signal on broad property policy easing.” 

Meanwhile, more cuts are expected throughout the year, although not all analysts anticipate a tidal wave of easing. 

Lu Ting, chief China economist at Nomura Holdings Inc argued that “the space left for future rate cuts this year is quite small,” he said. “We expect another 10 basis point rate cut before mid-2022.”

However, he did explain that the PBOC could choose to increase foreign exchange purchases significantly in the coming months. According to Lu, this would contain the yuan’s appreciation, ease concerns over Chinese companies’ offshore dollar bond defaults, and add liquidity to the economy.

Market implications

Meanwhile, though China's fourth-quarter gross domestic product came in hot and exceeded estimates, it was still at its weakest in around one and half years. December Retail Sales also disappointed, highlighting the impact of strict containment measures on the world's second-largest economy.

Any fallout to riskier assets, however, was limited by a surprise cut to some key lending rates by China's central bank.

''We think strong FX inflows might continue on the back of an elevated goods trade surplus and foreign buying of CNY assets, and thus, sudden CNY depreciation pressures and capital outflow pressures remain low," Goldman Sachs analysts said.