BEIJING- China is likely to implement proactive fiscal policy next year as there is still a need for the world’s second-biggest economy to realize stable growth, a former central banker was cited as saying in state-owned media.
The comment comes as the economy struggles for momentum after being hobbled by lengthy pandemic-busting measures, while market watchers fear severe debt woe among major property developers could spill over to other sectors.
“It is expected that next year China will continue to implement positive fiscal policy, monetary policies that are in line with positive fiscal policy, with a relatively large policy space to lower the reserve requirement ratio,” Sheng Songcheng, a former statistics and analysis director of the People’s Bank of China, said in comments reported by Shanghai Securities News.
With interest rates and loan prime rates at low levels, there is more space to cut banks’ reserve requirement ratio (RRR) than to cut interest rates, Sheng said.
The central bank lowered the RRR in September for the second time this year to boost liquidity and support economic recovery. Analysts expect another cut by year-end.
The weighted average RRR for financial institutions was around 7.4 percent after the cut.
China is prudent in cutting interest rates as its monetary policy needs to consider internal and external balance, Sheng said.
“It is expected that the interest rate differential between China and the US will enter a period of stabilization, so the renminbi (yuan) is likely to maintain a mild appreciation trend, but the appreciation is limited.”
China’s yuan slipped against the dollar on Monday, as market participants adopted a cautious approach ahead of key economic data and policy meetings for more clues on the health of the broader economy.
China has reported mixed factory activity data for November, according to official and private surveys, raising doubts on whether recent stimulus measures are sufficient to bolster a fragile economic recovery. China is due to report trade and inflation data later this week.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate around which the yuan is allowed to trade in a 2 percent band, at a six-month high of 7.1011 per dollar, 93 pips firmer than the previous fix of 7.1104.
The official fixing extended a months-long trend of being set at levels much stronger than market forecasts, which has been widely interpreted by traders as an attempt by authorities to keep the currency stable. Monday’s midpoint was 260 pips firmer than Reuters estimate of 7.1271.
“The strong yuan fix continues to convey a message of support for the yuan as domestic demand remain fragile and China’s property market continues to struggle to find a foothold,” Maybank analysts said in a note.
In the spot market, the onshore yuan opened at 7.1270 per dollar and was changing hands at 7.1323 at midday, 48 pips weaker than the previous late session close.
Its offshore counterpart was trading at 7.1343 per dollar around midday.
Dealers said that besides the looming China data, the currency market was also waiting for more external guidance including from the Federal Reserve amid firming bets the US rate-hike cycle was over.
A broadly weaker dollar has allowed the yuan to recover some lost ground, with the Chinese currency gaining nearly 2.6 percent to the dollar in November to book the best monthly performance this year. However, it is still down 3 percent year-to-date.
Chinese companies, especially exporters, convert more of their foreign exchange receipts into the yuan towards the year-end and Lunar New Year for various payments, including year-end bonus handouts to their employees.
While these customary settlements support the local currency, the underlying fragility of the economy and the wide China-US interest rate gap continue to keep yuan bears active.
Market attention also will be switched to the upcoming Politburo meeting and the annual Central Economic Work Conference, which usually discuss policy plans and the outlook for the world’s second-largest economy.
“We expect policymakers to set an ambitious growth target for 2024, plan a larger volume of government bond issuance, and keep other economic targets such as inflation and employment targets unchanged,” analysts at Goldman Sachs said in a note.-Reuters
