PBOC Set to Take Center Stage Hours After Expected Fed Hike
Bloomberg Intelligence sees the Fed raising rates on June 14.
(Bloomberg) -- With a Federal Reserve interest-rate hike next week all but a done deal, the burden of anticipation is shifting to a less predictable central bank 7,000 miles away: China’s.
When the Fed last hiked, in March, the People’s Bank of China followed suit hours later, boosting borrowing costs in what was seen as a bid to support the yuan by preserving the rate advantage over the U.S. Viewed at the time as a sign the two central banks were moving in step, much has changed over the past three months.
Economists are more skeptical that the PBOC will track the Fed this time around, with ING Groep NV, Australia & New Zealand Banking Group Ltd. and UBS Group AG judging China has already done enough. The yuan’s recent surge has turned around its weakening bias and the deleveraging campaign, revved up a gear in April, has propelled interbank rates higher.
“The PBOC will remain on hold,” said Tim Condon, head of Asia research at ING in Singapore. “The last rate hike was part of the tightening of monetary conditions, which included curbs on financial-system leverage. I think the authorities now will adopt a wait-and-see approach to determine whether more tightening is needed.”
Since the March hike -- which saw the PBOC boost the rate it charges in open-market operations and its medium-term lending facility by 10 basis points -- China has taken the yuan in hand, altering its approach to managing the currency in a bid to drive it higher, and burning bears in the process. Officials have also made a show of tackling financial risk, cracking down on speculation and leverage amid angst over the country’s record debt pile. Benchmark bond yields spiked to a two-year high last month, and stocks slid.
Wang Tao, head of China economic research at UBS in Hong Kong, also sees the PBOC standing pat next week, even with odds of a Fed hike above 90 percent, according to pricing of Fed funds futures contracts.
“Yuan depreciation pressure has faded,” meaning U.S. tightening will have limited impact on the currency, she said. “The market has more or less already priced in a June Fed hike.”
Bloomberg Intelligence sees the Fed raising rates on June 14: read more here.
China has a history of trying to preempt the impact of Fed moves.
In the run-up to the December 2015 Fed hike, officials tried to de-emphasize the yuan’s exchange rate versus the dollar, publishing a new index of the currency valued against a range of counterparts. The news sent it tumbling, however, and by the eve of the U.S. announcement China was intervening to prop up the yuan.
The Fed’s rate rise a year later also rocked Chinese markets, with the unexpected inclusion of a prediction for three increases in 2017 contributing to the yuan’s slide to a 2008 low. Conversely, the currency rallied after the PBOC matched the Fed in March.
The Chinese central bank didn’t reply to a fax request seeking comments.
The groundwork the PBOC has put in place over the past three months means that China is now leading the Fed in terms of tightening, rather than following it, said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong.
“China faces little pressure to follow the Fed because its effective interest rates have already gone up noticeably,” said Liang Hong, chief economist at China International Capital Corp. in Beijing. She cited the almost 1 percentage point increase in 10-year bond yields over the past year.
But not everyone is letting their guard down. Standard Chartered Plc’s Eddie Cheung says China’s rate gap with the U.S. is still a focus for the PBOC.
“Policy makers have made it very clear that they want the yuan to be strong in the near term,” said Cheung, a currency strategist in Hong Kong. He sees the PBOC boosting rates on open-market operations after the Fed so the rate differential doesn’t become a reason for investors to renew selling pressure on the yuan.
Officials are speculated to have paired stronger yuan fixing rates over the past few weeks with dollar sales to re-orient the currency on a rising path. The exchange rate jumped 1.2 percent in May, posting the biggest monthly advance in more than a year. While that’s forced strategists to moderate their forecasts, they still expect further losses. The yuan was at 6.7939 per dollar in Shanghai Thursday, stronger than its 6.8002 average over the past year.
Scotiabank, too, expects a repeat of March, with analysts tipping another 10 basis-point increase to the PBOC’s medium-term loan rate should the Fed hike by 25 basis points.
China may have been supercharging the yuan to insulate it ahead of a potential dollar rally on the Fed, says Tom Orlik, chief Asia economist for Bloomberg Intelligence in Beijing. Evidence that growth in Asia’s largest economy has peaked this year also makes raising borrowing costs less palatable, so supporting the currency is a good alternative, he said.
While it isn’t necessary for the PBOC to follow the Fed this time, the potential for more U.S. tightening over the next three years means they’ll have to confront the issue again, says Hua Changchun, global chief economist at Guotai Junan Securities Co. in Shenzhen.
“The PBOC will be in a dilemma later,” Hua said. “Downward pressure on China’s economy will mount late this year and next year -- following the Fed at that time will be painful.”
--With assistance from Christopher Anstey and Kevin Hamlin
To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net, Xiaoqing Pi in Beijing at xpi1@bloomberg.net.
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Jeffrey Black at jblack25@bloomberg.net, Emma O'Brien, Jeff Kearns
With assistance from Tian Chen, Xiaoqing Pi