PBOC member urges stimulus to boost consumption

PBOC monetary policy maker Cai Fang has published a letter calling for urgent consumer stimulus:

If the household budget curve is not repaired in time, the lack of confidence in residents’ consumption may turn from short-term behavior to long-term behavior. This long-term behavior means entering the so-called “balance sheet recession”.

For the new normal that the Chinese economy, especially the microcosmic behavior of residents, may face, macroeconomic policies need to have new ideas, starting from stimulating consumption to expand domestic demand.

He made three requests:

1. US all ‘reasonable’ economic channels to send money to residents’ pockets
2. Reform the household registration system centered on the settlement of migrant workers
3. Significantly increase basic social insurance and other basic services related to aging

The PBOC sets the MLF lending rates tomorrow and there’s already some talk of a cut. Six of 26 market watchers polled by Reuters see a cut to the one-year rate, which was last lowered by 10 bps to 2.65% in June.

One argument against cutting rates is that the yuan has declined 5% this year against the US dollar at a time when policymakers called for a stable rate. Further cuts could cause further erosion but I don’t think that represents a major hurdle at a time where the US dollar is appreciating broadly.

Calls for stimulus in China aren’t new but they have rarely come so directly from inside the PBOC. Cai Fang has been on the MPC since 2021 and was previously a well-known economist at the government-linked Chinese Academy of Social Sciences.

There have been a series of half-measures from Chinese policymakers and the market is losing patience that anything meaningful will come. I think the PBOC themselves have room to cut rates, especially with year-over-year inflation at zero right now. The question is whether Xi Jinping wants to bring out the fiscal bazooka.

On Tuesday, we get a series of Chinese economic data points from jobs to retail sales to industrial production. If those numbers are soft, expect even louder calls for stimulus.