BEIJING: The unmistakable signal from US Federal Reserve chairman Jerome Powell that a rate cut is imminent hands China more room to manoeuvre in easing its own monetary policy. The question is on which tool to use.
With a slowing economy, resurgent deflationary fears and the downdraft from trade tensions, the case for easier policy from the People’s Bank of China (PBoC) is building. A more stable yuan also gives Governor Yi Gang and other policy makers more leeway.
“If the Fed does cut rates in July, it would open room for a domestic interest rate cut here,” Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing wrote in a note. “China’s central bank will very likely follow suit.”
It’s not as simple as matching one rate cut in Washington with another in Beijing, though. China’s complex array of monetary tools is in flux, and the instrument that’s nominally still the “benchmark” is falling into disuse. Policy makers have given few clues about their intentions, and a meeting of the Politburo later this month may be the first opportunity to clarify the government’s intentions.
Here’s an analysis of different monetary easing venues:
> Reverse repurchase rate
The interest rate the PBoC charges on seven-day reverse repo operations had been its most favoured tool to mirror the Fed’s rate decisions in recent years. The central bank raised the cost of the short-term loans by 5 basis points in March 2018 after a Fed hike, but has kept the price unchanged since then. The rate is seen falling in the second half of the year, according to a Bloomberg survey of economists last month.
> Rate reformA recent state council meeting presided over by Premier Li Keqiang pledged to lower “real” borrowing costs, indicating the easing will come from better transmission of monetary policy and lower loan application fees, rather than a direct interest rates reduction.
A long-postponed reform of interest rates to make borrowing costs more market-oriented is gathering pace. While details aren’t yet available yet about the revamp, policy makers are working to make interbank borrowing and bond yields more in line with the price charged for the PBoC’s short-term and mid-term loans.
>Reserve ratiosLowering the amount of money banks have to deposit at the central bank can provide cheap long-term funding to lenders and encourage credit growth. The ratio of required reserves is seen declining further this year, according to a Bloomberg survey of economists.
> Medium-term lending facilityThe borrowing cost the PBoC charges for more expensive longer-maturity loans usually moves along with the rate for 7-day reverse repo operations, otherwise it’d give way to interest rate arbitrage. The overall amount borrowed via this facility has been declining, and with more reserve-ratio cuts on the way, that can help banks pay off those loans and replace them with cheaper options.
> Benchmark rateChina’s one-year lending rate, a tool that governs borrowing costs across the whole economy, is arguably the least likely to be used. Amid concerns about the fragile yuan, rising household debt as well as the risk of property and stock market bubbles, policy makers have shied away from adjusting this rate since 2015.
The PBoC is on track to revamp the rates system this year, which may cause the so-called benchmark to be scrapped altogether. — Bloomberg