Conditions for Rate Hike by PBOC Not Yet Ripe: Bank of Communications


The chief economist of one of China’s big state-owned banks does not expect the central bank to hike interest rates any time soon.

Speaking at the 8th China Securities Analysts Golden Bull Awards Summit on 9 December, Lian Ping (连平), chief economist of the Bank of Communications, said that China’s economy will “stabilise amidst easing” in 2018, with GDP growth expected to slow to around 6.7%.

“We feel both happy yet concerned about the macroeconomic environment in 2018,” said Lian.

“What we’re happy about is the overall progress of the global economy’s recovery – Chinese exports will have a far better international market environment.

“What we’re concerned about is changes to global capital flows, in particular the ongoing progress of US rate hikes and balance sheet shrinkage, and the challenges that this will bring to China’s balance of payments, RMB exchange rates, RMB internationalisation and monetary policy.”

According to Lian monetary policy is unlikely to see marked tightening, and “conditions for an interest rate hike by the central bank are not yet mature, given that economic growth still faces downward pressure, inflation is at moderate levels, financial costs are on the rise, financial deleveraging is seeing some initial results, and policy could create reduplicated effects.”

When it comes to the Chinese economic environment, Lian sees exports performing well, investment easing, and consumption remaining stable.

Developed economies in North America and the Eurozone are seeing better growth while emerging markets are improving, so a warming up of global market demand will serve to spur Chinese export growth.

Investment could continue to ease, with infrastructure spending limited by a crackdown on local government financing platforms as well as China’s ongoing deleveraging campaign.

Manufacturing continues to face issue with overcapacity, hampering new investment growth in the near-term, while cooling property markets will impede investment in real estate development.

Lian sees consumption remaining stable overall, with efforts to stimulate rural villages as well as consumption upgrade policies and opening of the services sector providing fresh impetus to consumption growth.

Vehicle purchases and real-estate related consumption are likely to slow, however.

Lian points out that China is still in the process of cultivating new economic growth drivers, and that “supply-side structural reforms, economic structural adjustments, and the rapid transformation of the services sector into a stabiliser for the economy is driving China’s transition from an industrial economy society to a services economy society.”

With respect to monetary policy, Lian Ping notes that the People’s Bank of China made repeated reference to “stability” and “neutrality” as the primary theme of policy in its 2017 Q3 monetary policy implementation report.

For this reason Lian see a strong likelihood that the central bank maintains this position in 2018, and refrains from hiking interest rates.

While China’s ongoing financial deleveraging campaign, increases in capital outflows and Renminbi depreciation pressure, as well as further declines in foreign reserves, could serve to prompt interest rate hikes, Lian points out that a number of countervailing factors make an increase unlikely.

Chief amongst them is ongoing downward pressure on economic growth, which will make Beijing extremely cautious about any adjustments to base interest rates.

Inflation has also moderated, and is unlikely to reach levels that would support an interest rate hike in 2018, while financing costs continue to rise, including money market rates, long-term bond rates and the interest rates on bank loans.