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MNI EXCLUSIVE: PBOC Tightening Likely Over, Policy At Neutral


The central bank has an eye on interest rate spreads, advisors say

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The People's Bank of China may have completed its recent tightening although loosening is unlikely as authorities seek to maintain interest rate spreads at a time of rising U.S. yields and to curb rising asset prices at home, policy advisors told MNI.

The 7-day repo rate for depositary institutions jumped to 3.17% on Feb 1, up from as low as 1.14% last March, as the PBOC eased back on the money market operations it had used to pump liquidity into markets in response to the Covid-19 pandemic. With core inflation soft, and manufacturing and consumption both still weak even as fiscal stimulus is withdrawn, the central bank is likely to keep policy on neutral "prudent" settings while also aiming to contain financial stability risks, advisors said.

After normalising policy since the second half of 2020, the PBOC will not tighten continuously and is more likely to fine tune its policy within the overall prudent stance, said Zhang Ming, deputy director of the institute of Finance at the Chinese Academy of Social Sciences, pointing also to concerns over a possible rise in defaults by local-government- and state-owned companies, as well as to the lingering effects of 2020's yuan appreciation against the dollar.

But the chances of a rate cut this year are low, said Zhao Qingming, a finance specialist and a former researcher at the PBOC, noting that Chinese authorities will be keen to maintain interest rate spreads as U.S. yields rise and given China's robust economic performance and signs of inflation creeping up.

A spread of about 120 basis points with U.S. rates would be appropriate, another advisor close to the PBOC said.


The PBOC kept its Loan Prime Rate unchanged for a 10th consecutive month in February, after cutting it by 30 basis points in the first half of 2020. Last year's cut did not stop money market rates and China's 10-year government bond yield from rising, the anonymous advisor noted, adding that further cuts in the five-year LPR, standing at 4.65%, would be inappropriate anyway as they could fuel property market speculation, which the authorities are trying to limit.

The central bank has also called for investors to focus more on its policy rates than on its open-market operations in order to better understand its intentions. Money market rates have not been tracking policy rates, being influenced by other factors affecting liquidity, including government revenue collection as well as PBOC operations, said Chen Daofu, deputy director at the Financial Research Institute of the Development Research Center of the State Council. Chen suggested that both liquidity supply and policy rates remain important metrics for the policy stance. Money market rates were volatile during the Chinese Lunar Year holiday, but have now stabilised around the policy rates, Chen said.


However, the PBOC is expected to still be active. It is likely to provide liquidity to assist rising sales of local government bonds expected after the key annual policy-setting Two Sessions meetings beginning this week, which is likely to prioritise spending in key high-tech sectors, said Zhao Quanhou, director of the Financial Research Center at the Chinese Academy of Fiscal Sciences under the Ministry of Finance.

At the same time, the PBOC wants to reduce the reliance of local governments and companies on cheap debt, which could be further stimulated if rates were reduced further, the anonymous advisor said.

For the moment, inflation is not central to the PBOC's concerns. Consumer and producer prices should rise only moderately this year. Now that credit expansion has peaked, and Covid-support policies are being withdrawn, the property and infrastructure sectors should be losing steam just as rising production eases supply-side pressures, helping to keep a lid on prices, Wu Ge, a former PBOC official, said.