(Bloomberg) -- China’s central bank is expected to keep borrowing costs on hold through the end of this year despite further Federal Reserve rate hikes from this week, as economic growth slows and the trade war with the U.S. gets worse.
The interest rate on People’s Bank of China seven-day reverse-repurchase agreements will stay at the current level of 2.55 percent through the end of the year, according to the median estimate in a Bloomberg survey of more than 40 traders and analysts conducted from Sept. 18-20.
Fed policy makers are widely expected to authorize a quarter-point hike in their benchmark overnight interest rate in Washington on Wednesday and signal they are on track to complete another increase before the end of the year.
"There is no need to follow," said Meng Xiangjuan, chief bond analyst at SWS Research Co. in Shanghai, adding that the stabilizing yuan-dollar exchange rate also reduces the pressure on the PBOC.
The escalating trade war with the U.S. and slowing economic growth are weighing on monetary policy decisions. China’s government is cutting some taxes, boosting spending, and loosening the monetary stance to ensure ample market liquidity.
"The trade uncertainty has prompted the central bank to maintain an accommodative bias," Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong, said in the survey, adding that the central bank will likely stay put as it did in June after the Fed raised rates.
‘Accommodative Bias’
Zhu Jianfang, chief economist at Citic Securities Co., also said in a research note that China is not likely to keep up with the Fed in the fourth quarter, citing the downward pressure on the real economy.
About 90 percent of the survey respondents said the central bank will inject more liquidity into the market in the fourth quarter. The medium-term lending facility tool is seen as being the most likely method for over 87 percent of respondents, with injections via a lowering of the reserve requirement ratio or open market operations also seen as possible for over 70 percent.
The PBOC will "try and maintain sufficient liquidity in the system", Jeremy Stevens, a Beijing-based economist at Standard Bank Group Ltd. said in response to the survey. The measures won’t translate into effective lending in the short term, but "that is better for the longer term outlook for the Chinese economy," he added.
Looser Liquidity
China is likely to see looser liquidity toward the end of this month as the peak for tax payment and local government bond issuance has passed, while fiscal spending will increase, the PBOC-run newspaper Financial News reported Wednesday, citing unidentified analysts at Minsheng Bank.
Overall banking liquidity is at relatively high level, the central bank said on Wednesday, as fiscal spending is offsetting the impact of maturing reverse repo operations.
The bond market will resume a rally in the fourth quarter, according to a survey of 27 fixed-income traders and strategists polled Sept. 18-20.
- The government bond yield curve will move lower and flatter, according to 17 of the respondents
- The median estimate was that yield on 10-year sovereign debt will end 2018 at 3.60 percent, compared with 3.6754 percent on Sept. 25
- Yield of 10-year China Development Bank bonds will be at 4.20 percent
- 48 percent of survey respondents expect fewer defaults in the last quarter of 2018, while 41 percent expect more and 11 percent see it being unchanged
- Top-rated corporate bonds will be the most favored type of fixed-income product, chosen by 17 of 27 respondents in response to a question which allowed multiple answers
©2018 Bloomberg L.P.
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