Domestics analysts say that the performance of the Chinese economy remains the primary concern for the People’s Bank of China when it comes to setting interest rates, after it refrained from following the latest hike by the US Fed.
On 14 June the US Fed voted to raise the target for its benchmark interest rate by 25 basis points, lifting it to its highest level since 2008 at 1.75% – 2%.
Fed officials have also forecast two further rate hikes this year, one more than prior expectations, as the US economy enjoys solid growth and employment gains.
PBOC took markets by surprise, however, by refraining from following the lead of the US Fed.
On the same date as the Fed rate hike the Chinese central bank made a net injection of 70 billion yuan via an auction of 7-day, 14-day and 28-day reverse repos, with rates for all tenors left unchanged at 2.55%, 2.70% and 2.85% respectively.
The US Fed has pushed through with four rate hikes since 2017, with the Chinese central bank following suite now on three occasions.
Domestic analysts say that China’s main concern when it comes to interest rates remains the performance of the domestic economy, as flagged by state-owned media following the appointment of Yi Gang as central bank governor in March.
“[PBOC] not following [Fed rate hikes] today means that the central bank is still observing things, and that it’s mainly concerned with internal factors,” said Zhu Zhenxin (朱振鑫), macro-economic researcher with Minsheng Securities, to 21st Century Business Herald.
“If in future the economy comes under greater downwards pressure, then increases in interest rates could be further delayed.”
“There are perhaps two main reasons that on this occasion [PBOC] hasn’t followed with rate hikes,” said Wen Bin (温彬), a researcher with China Minsheng Bank. “One is that June is quite a sensitive period for liquidity, and the goal for stability maintenance is stable liquidity.
“The second is that recently released financial and macro-economic data indicates that growth in consumption and investment is easing, while total social financing is contracting quite rapidly.
“Under these circumstances, keeping interest rates unchanged provides the market with stable expectations.”
Ming Ming (明明), chief fixed-income analyst with China Citic, said that there was still the possibility that PBOC would wait for a more opportune time for a rate hike after monitoring changes in domestic economic conditions.
Ming said that PBOC could also wait until the next Fed rate hike to undertake an increase of its own, spurring a shift in its monetary policy execution methods.
“A rise in the likelihood that PBOC will subsequently follow Fed rate hikes also significantly increases the space for operation combining reserve ratio cuts and MLF quantitative tools,” said Ming.
Zhu Zhenxin said that in the long term the Chinese central bank would follow the lead of the US, given that Beijing’s deleveraging campaign requires a comparatively high interest rate environment, and failure to follow would expand capital outflow pressure.
According to data from Wind the yields on 10-year Chinese government bonds and 10-year US treasuries stood at 3.6627% and 2.98% respectively as of 13 June, for a spread of 68 basis points.
Wen Bin said that given concerns about the impact of rate adjustments on the real economy, the best policy option for PBOC would be to raise rates while using reserve ratio reductions to swap out medium-term lending facilities (MLF), causing the long-term price of capital to decline.