MNI EXCLUSIVE: Main PBOC Rates Likely On Hold Until H2 2021

The People's Bank of China is likely to save any broad monetary policy easing measures for the second half of next year when the economy is expected to slow, continuing to rely in the meantime on targeted measures aimed at particular sectors benefitting less from 2020's rebound, a former official and policy advisors told MNI.

For the moment, slowing inflation will not deflect the PBOC from its gradual normalisation of monetary policy after a period of easing, with growth set to be solid through the first quarter of 2021, said Wu Ge, a former official at the PBOC's monetary policy department.

While money market rates have been rising since April, lending growth remains strong, though credit expansion should peak in the next month or so as the government bond issuance is completed and the authorities tighten rules on property market borrowing, noted Wu, now chief economist at Changjiang Securities.

A fall in consumer price inflation, which dropped to 1.7% year-on-year in September, less than half the official target of 3.5%, is largely due to the high base of comparison with 2019 when pork prices surged during an outbreak of African swine fever, and does not point to an overly cooling economy, Wu said.

The loan prime rate, the benchmark to set companies' cost of borrowing, is expected to remain unchanged on Tuesday after the PBOC held its Medium-Term Lending Facility rate on Oct.15.

WEAKENING INFLATION

Headline inflation should fall below 1% in Q4, and go even lower in 2021, said Chen Daofu, deputy director at the Financial Research Institute of the Development Research Center of the State Council.

But, while 2%-2.5% inflation would be appropriate for China and the current level indicates weak demand, Chen said the PBOC's monetary policy stance will remain unchanged, perhaps until the second half of next year, when base effects could prompt a slowdown in economic growth, particularly in Q4.

PBOC governor Yi Gang said in an article published Oct. 10 that the central bank will retain normal policy settings as long as possible, while acting to reduce fluctuations in the economy. The Bank has provided CNY9 trillion worth of stimulus this year, he noted, adding that over-easy policy could fuel excessive leverage and asset price bubbles. Accumulated financial risks could be exposed by economic stress originating at home or abroad, he said.

UNBALANCED RECOVERY

While China's economy as a whole has rebounded strongly, the recovery has been unbalanced, according to Wu. Migrant workers' earnings have taken a hit from Covid-19 lockdowns and private companies are struggling with higher funding costs than their state-owned counterparts, he said.

The PBOC needs to coordinate with fiscal authorities to support weaker sectors, said Zhang Yongjun, deputy chief economist at the China Center for International Economic Exchanges, though he warned that excessive credit support to sectors with weak demand may simply fuel arbitrage.

Financial instability risks usually present themselves in periods of tightening following significant monetary easing, said Wu, noting that it was still too early for this to occur in the current cycle.

The PBOC's reluctance to cut rates stems from concerns it may trigger a rise in house prices, pushing homes beyond the reach of some buyers, said Zhang Bin, a senior fellow of China Associate of Social Science. But rate cuts would be a better way of boosting growth than relying on government-led investment to stimulate demand, he said, arguing that the latter method would lead to still more accumulation of debt.