Chief economist update: The PBOC stimulates

Faced with slowing growth and above target inflation, what's a central bank to do?

In the case of the People's Bank of China (PBOC), it's going for growth.

In a surprise move, the Chinese central bank cut its seven-day reverse repo rate from 2.55% to 2.5% yesterday - the first rate reduction in four years (October 2015).

Markets certainly didn't expect the PBOC's easier policy announcement so soon after it injected CNY200 billion (US$28.6 billion) worth of liquidity into China's financial system via its MLF (medium-term lending facility) loans to banks on November 15 which, itself, came as a surprise for it followed the previous week's PBOC decision lowering the one-year MLF loans from 3.30% to 3.25% -- the first cut since 2016 - and at the same time injecting CNY400 billion (US$56.94 billion) in the system.

With Chinese GDP growth straddling the lower bound of its 6%-6.5% target - it grew by 6% in the year to the September quarter - the PBOC has every reason to act.

More so given the latest update on its partial growth stats, suggesting that fourth quarter activity continues to weaken.

Retail sales increased by 7.2% in the year to October -- down from 7.8% in the previous month, less than market expectations for an acceleration to 7.9% and the slowest rate since April this year.

Year on year growth in industrial production eased to 4.7% in October from 5.8% in the previous month and slower than market expectations for a 5.4% gain.

Worse, fixed asset investment growth slowed to 5.2% - its weakest reading on record - in the January to October period to CNY51.1 trillion from 5.4% in the period between January and September this year.

The PBOC would have done a bit more were it not for accelerating consumer prices. Headline CPI inflation quickened to 3.8% in the year to October from 3% in September. This was much higher than market expectations for an increase to 3.3%, is above the PBOC's 3% target rate and is the fastest rise in consumer prices in seven years - due largely to higher pork prices following the African swine fever outbreak.

Core inflation - excluding food and energy -- remained steady at a three-year low of 1.5%.

Read more: PBOCBank of China
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