Monetary policy and RRR measures… Credit growth in China is at the lowest level in almost the last 20 years. While this situation highlights the actions of the Chinese government and the central bank to reduce required reserve ratios, the situation in the real estate sector, especially Evergrande, has an increasing effect on credit risk. The PBOC policy focus is on balances and the adequacy of interest rate cuts alone in recent RRR actions and inactions.

Economic measures… Covid measures have made the economy more challenging for businesses. This situation will put the domestic demand into a troubled phase and the economy will be under the threat of recession as there will be serious stagnation in the sales of goods and services in the absence of demand. In an environment where companies have difficulties, credibility also decreases, so it is necessary to support the repayment of loans as well as lowering interest rates. While the financial conditions are on the loosening trend, there are items in economic measures such as liquidity support to SMEs, increasing the share of the private sector in new loans, postponing the debt payments of those affected by the epidemic, and local governments determining the loan conditions themselves in order to keep the housing demand low. Some items of the economic measure package also remind of the first period of the pandemic.

Conclusion? It looks like China will use all kinds of instruments, including the RRR, to support growth. In view of the momentum shown by the PMI data and the recent Covid measures increasing the operational difficulties of the companies, the continuation of the reductions in interest rates, which will serve as a reference for loans, will be considered. Given China's position in the global economy, adverse local developments tend to cause ripple effects in the economy. Slowing Chinese GDP growth alone will likely have negative effects on global economic growth; however, a slowing Chinese economy could cause contagion in emerging markets.

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