China Won’t Hike Rates Soon as it Exits Stimulus, Says State Media

China is very likely to exit from some of its stimulus measures as the economy improves, but there won’t be any interest rate hike soon, a leading state newspaper said on its front page Thursday.

“If previous rounds of withdrawing stimulus policies are a guide, ‘tight money’ and ‘tight credit’ are inevitable, and policy rate hikes are also normal,” the China Securities Journal said. “However, we shouldn’t see the monetary authority proactively raising the policy rate for some time to come.”

China Won’t Hike Rates Soon as it Exits Stimulus, Says State Media

While the state newspaper didn’t attribute its view to any policy maker, citing mainly economists instead, a front-page story could be seen as an official signal of policy.

Chinese officials have been talking about gradually winding back stimulus since the summer, alongside evidence of a rebounding economy fueled by strong export growth and a coronavirus outbreak that’s now under control domestically. The People’s Bank of China remains on course to taper its emergency support even as a string of defaults by government-linked companies sent tremors through the credit markets recently.

In a separate quarterly report released by the PBOC Thursday, it pledged to keep monetary policy “normal” for as long as possible. Other key highlights from the report:

  • The macro leverage ratio is expected to stabilize as economic growth gradually returns to its potential rate of growth
  • Pressure from non-performing loans will rise in the future
  • There is no basis for long-term inflation or deflation
  • It reiterated that prudent monetary policy should be more flexible, appropriate, and targeted
  • The mechanism for preventing and dealing with bond default risks will be improved
  • Yuan exchange rates will be kept flexible and authorities will let the market play a decisive role in the formation of the rate
  • Liquidity will be kept reasonable and ample to prevent the market from running short or being flooded with money

Government bond yields have risen sharply since the middle of the year amid signs of an economic recovery and expectations of a withdrawal of monetary stimulus. Traders have also been pricing in the possibility that banks will boost the benchmark interest rate for loans, known as the loan prime rate.

Read More: China Traders See Higher Rates in a World of Zero Yields: Chart

The PBOC has taken a measured approach to monetary support this year, lowering interest rates, injecting liquidity and giving businesses loan repayment holidays, but has refrained from the massive stimulus seen elsewhere.

Governor Yi Gang told market participants as early as June to start thinking about an exit from the looser financial policies. Several other officials have followed, including Liu Guoqiang, a vice governor at the central bank, who said earlier this month that an exit is likely “sooner or later.” Former Finance Minister Lou Jiwei said almost two weeks ago that it was time to study an orderly exit of loose monetary policies.

©2020 Bloomberg L.P.

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