MNI: PBOC To Aim To Drive Inflation Higher- Advisors
MNI (BEIJING) - The People's Bank of China’s shift to an easing stance will see a drive to push up inflation, policy advisors and economists told MNI, with a particular focus on bringing producer price inflation into positive levels and preventing further declines in stock and property prices.
Prices could experience a sustained rebound next year if the expansion in fiscal spending and “moderately loose monetary policy” flagged by the just-concluded Central Economic Work Conference prove effective, said Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University of China. China’s GDP deflator has declined for nine consecutive months, indicating deflationary pressures, he said. (See MNI INTERVIEW: PBOC To Cut Rates Further, Target 2% CPI)
Factory-gate inflation on a yearly basis has been stuck in negative territory for 26 consecutive months, a sign of overcapacity, said Xu Hongcai, deputy director at the China Association of Policy Science’s Economic Policy Commission, adding that there was room for PBOC rate cuts. The one-year Loan Prime Rate, based on quotes submitted by 20 banks, is currently 3.1%, but could be guided down to as low as 2.2%,given that rates on one-year deposits could be reduced to 1% as banks need a gap of about 1.2% between the two to remain profitable, he said.
The PBOC will move gradually, though, said Xu, meaning that its rate-cutting phase may extend into 2026.
CONSTRAINTS ON EASING
The constraints imposed by Federal Reserve easing pace and narrowed interest margins for Chinese banks, might mean the PBOC eases more by reducing reserve requirements than by rate cuts, according to Zong Liang, chief researcher at Bank of China Research Institute.
Monetary easing is likely to pressure the yuan, so the PBOC will have to enact policy changes gradually in order to ensure depreciation is limited and smooth, advisors said, with Xu specifying that the yuan should not be allowed to weaken more than 3% to below 7.50 to the dollar.
The CEWC repeated its stance of maintaining a stable exchange rate at a reasonable level, so any sharp depreciation is impossible, noted Zhao, though he cautioned that China could use a weaker yuan to offset U.S. tariffs in extreme circumstances. (See MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials)
Still, reliance on currency depreciation to boost exports would not be conducive to the long-term stability of foreign trade and investment, said Zong, adding that while the central bank may raise its tolerance for depreciation against the U.S. dollar, the yuan could be stable or even appreciate against a basket of currencies.
The PBOC must also be mindful of the risk of a flattening yield curve as longer rates fall, said Xu.
The Conference also called for supply side moves to eliminate “involutional competition” in order to restore business expectations, Xu noted. This phrase refers to damaging competition within China’s industries.