(Bloomberg) — China has signaled it will step up monetary stimulus to the economy, acknowledging that domestic and global risks are now greater than expected.

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Officials will use several monetary policy tools at the “appropriate time” to support the real economy, according to a report from a State Council meeting chaired by Premier Li Keqiang on Wednesday. The “complexity and uncertainty of domestic and foreign environments have intensified, and some have exceeded expectations,” the meeting said.

The State Council, China’s Cabinet, did not mention any specific easing measures, such as reducing the reserve requirement ratio. It had previously given signals for a reduction in the RRR in July and December days before the People’s Bank of China cut the ratio.

Chinese authorities have made repeated vows to stabilize the economy in recent weeks as Covid restrictions curb spending and business activity. A confidence gauge in the services sector fell in March to its lowest level in about two years, while the country’s financial hub, Shanghai, is in complete lockdown. This calls into question the government’s ambitious growth target of around 5.5% for this year.

The State Council said that while the economy was still moving within a reasonable range, further downward pressures have intensified, with more frequent virus outbreaks, a slowing global economic recovery and swings in prices. raw material prices. The government should quickly introduce measures conducive to stabilizing market expectations and introduce some policies set out in the government work report, he said.

Top financial leaders pledged last month to ease regulatory repression, support property developers and stimulate the economy through monetary policy. However, few concrete steps have been taken so far.

Although the meeting did not explicitly mention cuts to the reserve requirement ratio and key interest rates, further cuts are likely to be part of the package to support growth, wrote economists from Goldman Sachs Group Inc., whose Maggie Wei, in a note. They predicted a 10 basis point cut in key interest rates and a 50 basis point reduction in the RRR, without providing a timetable for the easing.

An interest rate cut on one-year contract loans – the medium-term lending facility – could come as early as next week, according to a Bloomberg survey.

Small enterprises

Huatai Securities analysts also argued that there is still a need to cut interest rates and RRR, although they said there is no urgency to cut the latter and the downside margin interest rates were limited. The mention of multiple monetary tools, however, suggests that measures such as MLF injections, loan schemes, loan support for small businesses are also on the table, they said in a report.

The State Council said the government would extend the deferral of pension contributions to more troubled industries, such as civil aviation and other transport sectors, after the policy had already been applied to restaurants, retail and tourism.

Lockdowns and other restrictions aimed at curbing the spread of Covid-19 show that spending is still well below pre-pandemic levels. Tourism revenue during the three national holiday days that ended on Tuesday was only about 39 percent of the level reached during the same period in 2019, according to data from the Ministry of Culture and Tourism.

The State Council has also pledged to improve financial services for new city dwellers and demand for affordable housing, as part of an effort to boost consumption. He added that the proceeds from the local government special bonds will be used to replenish the capital of medium and small-sized banks to improve their ability to extend credit.

In addition, the central bank published a draft stability fund to provide support to financial companies in difficulty. The fund will be made up of capital from financial institutions and will receive liquidity support from the PBOC, according to a bill released on Wednesday. The size of the fund was not specified.

Bloomberg News reported last week that the central bank was leading an effort to raise several hundred billion yuan for a new fund to defuse financial risks. China is scrambling to stem financial risks ranging from hundreds of weak rural banks to dozens of struggling developers struggling with at least $1 trillion in debt.

(Updated with comments from economists.)

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