The decline in China’s Q1 GDP made history but was not a big surprise. The pace of contraction looks set to ease this quarter but with external headwinds intensifying and the labour market in a precarious state, year-on-year GDP growth will probably remain in negative territory. In response to the ongoing weakness, the PBOC has pushed down interbank rates, which we think could hit the zero lower bound (ZLB) before long. But unlike central banks elsewhere, hitting the ZLB may not trigger major changes to the PBOC’s policy framework.
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