China Central Bank Holds Interest Rate With Focus Now on RRR
Growth projections for China have been steadily downgraded this year.
(Bloomberg) -- China’s central bank refrained from cutting interest rates and injecting liquidity into the economy on Friday, disappointing analysts who had expected more forceful action to cushion growth from worsening Covid outbreaks.
The focus now shifts to a possible reduction in the reserve requirement ratio for banks, a move that would give lenders cheap funding to spur loans and growth in the economy. The State Council, China’s cabinet, hinted strongly on Wednesday of a reduction in the RRR.
The People’s Bank of China kept the rate on its one-year policy loans at 2.85% on Friday. Only 6 of the 22 economists surveyed by Bloomberg had predicted the decision, with a majority expecting a reduction of 5-10 basis points.
The PBOC also refrained from injecting extra liquidity into the financial system, opting instead to roll over the 150 billion yuan ($23.5 billion) of loans maturing in the medium-term lending facility. Economists had expected a net injection of 100 billion yuan.
Growth projections for China have been steadily downgraded this year and top officials have repeatedly warned about the deteriorating outlook as Covid lockdowns spread. Economists now expect growth to slow to 5% in 2022, below the government’s target of around 5.5%.
While Beijing has pledged to step up monetary stimulus, it’s facing a narrower window in which to do so as the U.S. Federal Reserve and other central banks hike rates to combat soaring inflation. Tighter monetary policy in the U.S. has already wiped out China’s yield premium over U.S. Treasuries, adding to capital outflow pressures and threatening the yuan.
“China’s monetary policy space is already limited, so it probably doesn’t want to use all of the stimulus tools within a short period of time,” said Lu Ting, chief China economist at Nomura Holdings Inc.
The benchmark CSI 300 Index was down 0.4% as of the mid-day trading break, having rallied 1.3% on Thursday amid expectations of a rate cut. The liquidity-sensitive ChiNext Index slid more than 1%. The 10-year government bond yield was up 1 basis point to 2.76%, after earlier rising as much as 2 basis points.
What Bloomberg Economics Says
“Pressure is mounting on the PBOC to do more to spur lending, given continued supply chain snarls and the hit to activity from lockdowns in Shanghai and other cities.
“Further out, we see the central bank cutting its key rate in May or June to support growth. We stick to the view that the PBOC will reduce the rate by another 30 bps by year’s end.”
David Qu, China economist
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Market participants are anticipating a reduction in the RRR as soon as Friday. Senior central bank officials said at a press briefing Thursday that the tool would be used at the “proper time.”
“We think the central bank may follow up with a 50-basis point RRR cut today,” said Liu Peiqian, China economist at NatWest Group Plc. By refraining to cut interest rates, the PBOC may want to avoid “excessive easing that may fuel a renewed round of debt surge,” she added.
Nomura’s Lu said the PBOC may opt to cut interest rates in April or May, after it reduces the RRR, predicting a 10-basis point reduction in policy rates by the end of this year. The room for policy easing is limited, he said, due to the Federal Reserve’s rate hikes, the need to protect commercial banks’ profitability and a worsening inflation outlook, he said.
China’s yield advantage over Treasuries disappeared for the first time in more than a decade earlier this week, after overseas investors offloaded a record amount of Chinese sovereign bonds in March and trimmed holdings of mainland equities for the first time since September 2020.
Officials from China’s banking regulator said Fed rate hikes and the declining China-U.S. yield gap have led to some pressure on Chinese assets, as global capital starts flowing back to the U.S. However, they cited a number of reasons why Chinese assets are still appealing to foreign investors.
Real interest rates in the U.S. are much lower than in China due to the high inflation there, Ye Yanfei, an official from the policy research bureau at the China Banking and Insurance Regulatory Commission, said at a briefing Friday. In addition, China’s economy still has huge room to expand, and its sovereign credit remains very stable, all contributing to the attractiveness of local assets, he said.
Chinese banks may still cut loan prime costs -- the de-facto benchmark loan rates -- on April 20 after the government urged them to “make reasonable interest concessions,” Citigroup Inc. economists wrote in a Thursday note.
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With assistance from Bloomberg