The Party’s leadership put environmental protection as one of the three key “tough battles” and asked local governments to reduce air-pollution level by 18% in 2020 from that of 2015. So far, most provinces have beat the targets thanks to tough restrictions on the industrial sector, especially in winter when pollution is worse.
We don’t share the view that the market is seeing a rate-cut cycle. The PBOC may be able to cut LPR for another 2-3 times by a total of 10-15 bps, and no more. But even that will only bring the total rate reduction to 26-31bps, which equals to one rate cut under the previous system, still with less impact because they only apply to part of new bank loans. This is hardly a “cycle”.
The room for further monetary easing may be more limited than what the market believes, and it is difficult for interest rates to fall further in China. This is because the economy is likely to set for stabilization or even a mini cyclical rebound after six straight quarters of slowdown, as the outlooks for housing and automobile are quite positive. Also, the economy is not heading for deflation. The decline of PPI year-on-year growth is probably ending while the pork-led CPI inflation is to surge further. Last, the external pressure may also ease slightly if Beijing could strike a truce with Washington.
