International Finance Association: "China's Economy Can Grow 5% If Accompanied by Stimulus Measures"

"Reserve Requirement Ratio Cut, Housing Market Stimulus Expected"

There is a forecast that China's economy could grow by more than 5% this year, surpassing market expectations, if accompanied by stimulus measures.

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According to the Institute of International Finance (IIF) on the 6th, "China has the capacity to introduce financial and fiscal stimulus measures this year," but "there is a risk of economic downturn if appropriate stimulus is not implemented." The growth rate forecast presented by the IIF is 5%, higher than the market consensus (average forecast) of 4.6%.

The IIF predicted that with the 0.5 percentage point cut in the reserve requirement ratio (RRR) effective from the 5th, the Chinese authorities have room to lower the RRR further from the current average level of about 7%. The RRR is the ratio of deposits that commercial banks must hold at the central bank. When the RRR is lowered, more money is released into the market. China lowered the RRR from 10.5% to 10.0%, marking the largest cut in two years.

The People's Bank of China (PBOC) is also likely to reduce the 7-day reverse repurchase agreement (repo) rate and the 1-year Medium-term Lending Facility (MLF) rate, which are tools of open market operations (OMO), from 1.8% and 2.5% respectively by 20 to 50 basis points (1bp = 0.01 percentage points). The MLF rate is the interest rate applied by the PBOC when lending funds to commercial banks, and it has been lowered when liquidity supply to the market is needed. Additionally, to revive the sluggish housing market, expansion of the PBOC’s long-term lending program for liquidity supply, the Pledged Supplementary Lending (PSL), may also be considered.

China's potential growth rate has been declining continuously over the past 20 years. With the average growth rate for 2022-23 remaining at 4.1%, the consumer price index (CPI) in the fourth quarter of last year entered deflation territory (a decline in prices amid economic recession).

Deflation has adversely affected China's corporate earnings, stock prices, wage growth, and tax revenues, all measured on a nominal basis. Last year, Chinese corporate profits decreased by 4%, and the CSI 300 Index, a representative Chinese stock index, fell by 11%, becoming one of the worst-performing indices globally. The 9% decline in the export price index also acted as a negative factor for export growth.

This content was produced with the assistance of AI translation services.