Targeted monetary easing likely to continue as China GDP growth slows again in Q3

30 Oct 2019

Facing strong growth headwinds, Beijing will likely maintain its policy easing bias for some time yet. We believe this scenario is positive for bonds in the short term, but weak GDP growth looks set to limit equity performance until signs of solid economic stabilisation or recovery emerge, as Chi Lo argues in this edition of The Intelligence Report.

  • Although monetary aggregates have recovered, the credit squeeze on the private sector has eased only slightly
  • Further cuts to the reserve requirement ratio and interest rates look likely in the coming months
  • The trade war with the US will remain the biggest risk overhanging the stock market.

China’s GDP grew by 6.0% year-on-year (YoY) in Q3 2019, slowing further from 6.4% in Q1 and 6.2% in Q2. Over the year to date, GDP has grown by 6.2% YoY. Even if Q4 growth were to come in at 5.8%, as many observers are anticipating, full-year 2019 growth would still hit 6.1% YoY. Meanwhile, nominal GDP growth slowed to 7.5% YoY in Q3 from 8.0% in Q2.


Supportive measures are having an effect…

Looking more closely, the data shows that the easing measures implemented by Beijing since July might be showing stabilising effects. September’s aggregate financing data was better than the market expectations with a broad-based recovery in credit growth.

This suggests that:

  1. the recent policy easing has started to filter through the system
  2. the credit shock from the failures of Baoshang Bank, Jinzhou Bank and HengFeng Bank this year has been contained.


But balancing debt reduction and private sector lending remains a challenge

However, most bank lending was still going to major corporations, while loan growth to the private sector remained slow (see Exhibit 1). Meanwhile, trust loans contracted further in September. This indicates that Beijing’s debt reduction policy is continuing to rein in shadow banking activity, especially in preventing loans to the property sector. However, this has also restricted access to credit by the private sector via official and shadow bank loans.


Exhibit 1: Bank lending to the private sector has remained slow


Source: CEIC, BNP Paribas (Asia); October 2019


The consumer price index (CPI) rose by 3% YoY, due mainly to pork price inflation (64% YoY in September after 47% in August) resulting from an outbreak of swine flu. However, core CPI remained at below 2% and the producer price index contracted again by 1.2% YoY, implying underlying deflationary pressures.

Although pork price inflation may add more upward pressure to headline CPI inflation, this should not affect the policy easing bias of the People’s Bank of China (PBoC) in the coming months unless broad-based CPI pressure starts to build.


Exhibit 2:  Consumption as a share of GDP (%)


Source: CEIC, BNP Paribas (Asia); October 2019


Trade contracted both on the export and on the import side due to the trade conflict with the US and weak domestic demand momentum. This will likely remain a significant headwind to growth.


Growth target will entail PBoC easing

The macro-policy direction from Beijing seeks to deliver an average 6.2% GDP growth rate in 2019 and 2020 to achieve the doubling China’s real GDP growth from the level it was at in 2010. In this context, we expect the PBoC will need to ease monetary policy further.

We foresee a 50bp cut in the RRR and a cut of 40bp-50bp in the loan prime rate in the next three months. However, it is not clear whether the property sector would benefit from such measures, as Beijing remains wary of both a property price bubble and the fact that the property sector has been one of the biggest culprits in building up excess debt.