Winni Zhou, Andrew Galbraith –
China’s central bank could cut its benchmark policy rate for the first time in four years if the US Federal Reserve delivers a widely expected cut in late July, analysts say, as Chinese policymakers step up support for the slowing economy.
Market watchers, however, believe the People’s Bank of China (PBOC) is more likely to follow any US rate cut by lowering its key short-term money market rates.
It would not be the first time the PBOC has followed the Fed’s lead. In 2017 and 2018, the bank raised short-term money rates hours after US hikes, although in more modest and symbolic moves of 5 to 10 basis points.
While Chinese officials continue to downplay the likelihood of more aggressive easing, the economy has been slow to respond to a host of earlier stimulus measures, while the US-China trade war is growing longer and costlier.
Some analysts believe GDP growth is nearing the lower end of the government’s 2019 target range of 6-6.5 per cent, reinforcing expectations that more support is needed soon.
In a bid to spur more lending, the PBOC has injected huge amounts of liquidity into the financial system in various forms over the past year, targeting small and private companies in particular. It also has quietly guided some short-term rates lower to reduce corporate financing pressure.
But analysts say that has not jumpstarted investment as much as planned, as the uncertain business outlook leaves companies wary of making the fresh investments needed to steady the economy. They say a system-wide cut in interest rates may offer struggling firms more immediate relief.
“The current monetary policy transmission mechanism is jammed, and the impact of quantitative regulations is therefore limited,” said Ming Ming, head of fixed income research at CITIC Securities in Beijing.
“Lowering the interest rate is more appropriate for China now,” he said.
Markets have priced in a 25 basis-point cut to US interest rates when the Fed holds its next policy meeting on July 30-31, and expect several more later this year and next as the US economy cools.
China has not changed its benchmark one-year lending or deposit rate since October 2015, with the central bank preferring to use money market operations that influence short-term rates, and special loan schemes to direct credit to more vulnerable sectors.
A very forceful easing signal could pressure China’s yuan currency and encourage capital outflows, while adding to a mountain of debt leftover from past credit binges, analysts say. The PBOC reportedly told banks recently to stop cutting mortgage rates, amid persistent worries about a property bubble.
But an increasing number of China watchers now believe a benchmark rate cut cannot be ruled out if domestic and external economic conditions deteriorate further. Policy easing by the Fed would give the PBOC more room to manoeuvre. — Reuters