PBOC pledges more monetary policy support

China's central bank confirmed on Monday the continuation of its supportive monetary policy stance, a move that analysts said has reinforced expectations of another cut in the reserve requirement ratio to accommodate additional government bond issuance.

The ongoing policy dynamics have ushered the country into the first round of significant fiscal and monetary expansion following the pandemic period, signaling a much-anticipated mindset shift toward paying more heed to demand-side management in drafting economic policies that will continue in 2025, they added.

While delivering a report to the Standing Committee of the National People's Congress, China's top legislature, Pan Gongsheng, governor of the People's Bank of China, said the central bank will intensify countercyclical adjustments to shape a favorable condition for stable economic growth and high-quality development.

"We will adhere to a supportive monetary policy stance and increase the intensity of monetary policy adjustments," a statement published on the PBOC's website on Monday quoted Pan as saying, vowing to maintain reasonably sufficient liquidity and lower financing costs for enterprises and households.

Pan added that the central bank will improve policy tools to deal with abnormal fluctuations in the stock market, while optimizing policy mechanisms to make smooth the market-oriented formation and transmission of interest rates.

The remarks followed the approval by Chinese lawmakers on Friday of an increase of 6 trillion yuan ($833 billion) in the local government special bond ceiling to replace outstanding hidden debt. The new quota will be allocated evenly through 2026, with 2 trillion yuan for this year.

Feng Jianlin, chief economist at Beijing FOST Economic Consulting Co, said the central bank may soon coordinate with the 2 trillion yuan in bond issuance by lowering the RRR, which refers to the proportion of deposits banks must keep as reserves, to achieve the goal of "maintaining reasonably sufficient liquidity".

The cut, potentially by 0.5 percentage point, may release approximately 1 trillion yuan in long-term liquidity, Feng said, adding that the central bank may inject another 1 trillion yuan via a new open market operation tool, called outright reverse repo, while withdrawing some short-term liquidity.

Li Yong, a fixed-income analyst at Soochow Securities, said that cutting the RRR has become a necessity both for ensuring the steady issuance of special bonds and for achieving the policy target of promoting a reasonable rise in prices.

China's consumer price index grew 0.3 percent year-on-year in October, a four-month low and down from 0.4 percent in September, official data showed on Saturday. Financial data also pointed to the need for continued policy support as residential lending recovered while corporate financing remained weak in October.

Experts close to the central bank said the future monetary policy will "continue to provide sufficient support to the real economy" amid lingering economic headwinds and rising external uncertainties, adding that monetary policy has been prudent in nominal terms but moderately loose in real terms this year.

On the fiscal front, Yang Zhiyong, president of the Chinese Academy of Fiscal Sciences, said there remains scope for China to raise more debt and increase the deficit-to-GDP ratio in 2025.

"It is entirely possible to further strengthen fiscal policy adjustments," Yang added.

Ming Ming, chief economist at CITIC Securities, however, said there is limited possibility for further interest rate cuts in the remainder of the year, given that the central bank has acknowledged the constraints from banks' net interest margins and renminbi exchange rates.