Why China’s central bank is taking a different path from the Fed on interest rates
Beijing is holding off on an interbank rate rise as it focuses on bigger priorities at home
When China’s former central bank governor, the incumbent governor and the country’s top financial regulator addressed a room of bankers and government officials at a large forum in Shanghai on Thursday, they did not mention the biggest talking point for the global financial community: the US Federal Reserve’s hawkish decision on interest rates.
Zhou Xiaochuan, who was the People’s Bank of China (PBOC) chief for over 15 years until March, reviewed lessons from the global financial crisis a decade ago. Yi Gang, Zhou’s successor at the central bank, talked about plans to make Shanghai an international finance centre, while Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, focused on domestic financial risk control.
Their muted response to the Fed’s rate rise was accompanied by the PBOC decision – hours after the Fed move – to keep rates for interbank loans unchanged. The rates, namely rates for seven-day and 28-day reverse repurchase agreements, are not officially China’s policy rates, but by holding them steady Beijing sends a message that it is on a different path from the Fed.
Analysts said that the room for the PBOC to follow its US counterpart was shrinking as China’s growth lost steam quickly and debt repayment pressure for Chinese companies was mounting.
“The fact that they didn’t follow the Fed is already a signal,” Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, said at a briefing in Hong Kong on Friday. “I don’t think the PBOC is ready to see additional increases in the cost of funding [in light of the country’s debts].”