MNI:PBOC RRR Cut In View As Fed Narrows Policy Window-Advisors

The People’s Bank of China may cut reserve requirement ratios before an expected Federal Reserve rate hike in March further crimps its policy space, and is likely to be increasingly cautious about pushing forward with an easing cycle as it watches to see whether credit demand improves in response to past stimulus, policy advisors and economists told MNI.

A fall in the yield spread between 10-year China government bonds and equivalent U.S Treasuries to 80 basis points, reducing the relative attractiveness of Chinese financial assets, is likely to prompt the PBOC to slow the pace of rate cuts as it seeks to support a sluggish economy, one former PBOC official told MNI. (see: MNI INTERVIEW: Investment, Easy Policy The Mix For China GDP.) But it may send dovish signals in the first quarter via a reserve requirement cut, added the official, asking to remain anonymous,.

EASING CYCLE

The PBOC cut several policy rates last month, lowering the mid-level of its interest rate corridor by 10bps, which was interpreted as the start of an easing cycle. But on Tuesday, the PBOC paused, keeping the key one-year medium-term lending facility rate unchanged.

Dong Ximiao, chief researcher of China Merchants Finance, said it was reasonable for the PBOC to take time to assess the effect of its previous measures. The weighted-average corporate loan rate in 2021 dropped to a 40-year low 4.61%,and strong loan data in January indicated credit expansion was underway, he noted.

The benchmark loan prime rate now looks set to remain unchanged next Monday after consecutive cuts over the preceding two months, said Dong.
While the central bank is likely to want to provide additional stimulus to the real economy, by incentivising lenders to support key sectors, including through RRR and policy rate cuts, Dong also pointed to increasing PBOC caution as the Federal Reserve is expected to accelerate tightening.

WINDOW STILL OPEN

Advisors said the window for further PBOC rate cuts has not closed but depends on whether credit demand continues to improve.

The central bank also needs to be wary of providing excess liquidity and feeding asset bubbles in areas such as housing, while still maintaining “reasonable” efforts to lower borrowing costs to the real economy, said Liu Xiangdong, deputy director of the Department of Macro-Economic Studies at China Center for International Economic Exchange.

An expected boost in infrastructure investment is already set to provide more stimulus, he noted, adding that the recent strength in the yuan added little to the case for easing, since an expected export slowdown was likely to combine with Fed tightening to lower the currency’s momentum later in the year.

But inflation is playing in the PBOC’s favour. Year-on-year growth in both consumer and producer prices eased in January, coming in below expectations with CPI inflation at the weakest since last September.

However rising prices for imported commodities could put upward pressure on inflation later in the year, as China, which depends on oil, gas and iron from abroad, boosts infrastructure spending, Liu said. Higher costs could then contain growth prospects and domestic investments, he noted.