China’s central bank maintains accommodative lending policy to support economy
Despite expectations of better than average growth in first six months, People’s Bank of China continues to make funds available
While major central banks in the West have begun to pull back from pouring cash into the economy to drive growth, the People’s Bank of China seems unlikely to tighten its credit policy any time soon.
On Wednesday, the Bank of Canada raised its benchmark interest rate by a quarter of a point to 0.75 per cent, its first increase since 2010. In doing so, Canada became the first Group of Seven nation to follow the US Federal Reserve in raising the cost of borrowing for businesses and consumers, signalling a trend towards monetary tightening on the basis of steady growth.
China’s central bank on the other hand has kept its one-year benchmark rate unchanged since October 2015, and has so far been reluctant to join the credit tightening club. In June, when the Fed increased rates for the second time this year, the People’s Bank of China (PBOC) made it clear it would not be following suit.
And so emerged a divergence on monetary policy, with the West increasing rates and the East seeing no urgency to do so, according to Frederic Neumann, co-head of Asian economics at HSBC.
“The world appears seemingly in sync at the moment, with growth almost everywhere decent but hardly stellar,” he wrote. “[The] PBOC, however, will need to keep its foot on the gas for a while longer.”
China is poised to post better than expected half-year growth of over 6.5 per cent – the bottom line target for the whole year set by Beijing. However, inflation has averaged less than two per cent and the growth in the first six months was mostly driven by state-led investment in infrastructure. Analysts expect China’s economy to peak soon and start slowing down later this year, once property cooling measures began to rein in investment.
All of these have led China’s central bank to be accommodative on lending – to support growth and assist economic restructuring, particularly when tightened financial regulations have triggered worries about a shortage of funding and also made it difficult for banks and financial institutions to borrow from money markets.
“The government was worried about overly rapid supervisory tightening triggering liquidity risks,” Wang Tao, chief China economist at UBS Securities, wrote in a note.
There have been signs of easing recently. On Thursday, the central bank injected 360 billion yuan (US$53.1 billion) into the economy via its medium-term lending facility and with a one-year term to ensure sufficient capital for the real economy and keep the cost of borrowing stable.
Raising rates can also increase vulnerability of many debt-fuelled Chinese companies, particularly inefficient state-owned enterprises, which have difficulties fulfilling repayments.
Alicia Garcia Herrero, chief economist for Asia-Pacific at French bank Natixis, said the PBOC had no choice but to stay accommodative, as “there is a clear need for fresh cash to cover the massive amount of debt that Chinese corporations have been accumulating.”
Julian Evans-Pritchard, a China economist from consultancy Capital Economics, said the biggest risk of the PBOC not moving in line with other central banks on rate hikes was a surge in capital outflows, as a stronger dollar could put depreciation pressure on the yuan. Tighter restrictions on outbound investment and a trade surplus have so far helped reduce such pressures.
China’s foreign exchange reserve, which the central bank uses to hedge against exchange risks, rose for a fifth straight month in June to more than US$3.05 trillion.
“The bank appears to have convinced market participants that it has the firepower to prevent a sharp fall in the yuan,” Evans-Pritchard said. “As a result, deprecation expectations have moderated.”