Across The Border

PBOC sticks to prudent policies to keep the yuan stable

Central bank says any cuts to bank reserve requirements could put downward pressure on the Chinese currency and the country’s foreign exchange reserves

PUBLISHED : Tuesday, 09 August, 2016, 2:51pm
UPDATED : Tuesday, 09 August, 2016, 10:12pm

The People’s Bank of China has dashed any hopes of further monetary easing in the near term, as concerns continued over a possible asset bubble and the yuan’s continued depreciation.

In its latest quarterly monetary policy report, released last Friday, the central bank said it would maintain a prudent monetary policy and create a neutral and appropriate monetary and financial environment.

“The more liquidity any cut in the RRR (required reserve ratio) might bring to the market, the stronger the expectation of the yuan’s further depreciation,” said the report.

It also said inflationary expectation remains unstable, but that the decline in the PPI (producer price index) is clearly decelerating, which is viewed by analysts as an indication that inflationary pressure may refrain the central bank from any further easing.

China’s PPI fell 1.7 per cent in July from a year ago, said the National Bureau of Statistics, smaller than June’s 2.6 per cent decline.

“Without an interest rate cut, those heavily indebted sectors or companies will be disappointed,” said Benny Manu, chairman of the Hong Kong Securities Association.

However, “the PBOC does not have any intention of changing its overall monetary stance”, said China Merchants Securities in its latest research note, adding “further monetary easing within this year could be ruled out”.

Harrison Hu, a Singapore-based chief greater China economist at Royal Bank of Scotland Group Plc, also thinks the central bank’s recent comments rule out any RRR or rate cut in the near term.

While Hong Hao, managing director and chief strategist at the Bocom International in Hong Kong, said he thought an interest rate cut was simply “unnecessary at this stage, and unable to boost the economy”.

The biggest current issue, according to many experts, is the shortage of good investment options, rather than any shortage of money.

“We have enough money in the market but the problem is money doesn’t know where to go, given the current low returns and high risks in most sectors in China,” said one analyst at a major Chinese commercial bank.

“More liquidity unleashed by an interest rate or RRR cut in no way can solve the problem.”

Last month, Sheng Songcheng, the PBOC’s head of statistics and analysis, said that China is seemingly falling into a “liquidity trap” where companies prefer to hoard cash rather than invest it.

Despite loads of liquidity being pumped into the market, enterprises appear to prefer banking the money in current accounts in the absence of any good investment options, he said

In addition, lower interest rates and more liquidity could create more risk for China’s economy and its financial markets.

“Asset bubbles are one of the major concerns for the bank at the moment,” said Hong Hao.

According to the latest PBOC report, China’s home mortgage loans increased by 2.3 trillion yuan in the first half of the year, which is 1.2 trillion yuan higher than the year earlier.

As of the end of June 2016, the outstanding loans that Chinese financial institutions had granted to the real estate sector amounted to 23.9 trillion yuan, 24 per cent higher than one year earlier, and 1.85 per cent faster than at the end of March.

Lower interest rates could spur asset prices even higher and cause asset bubbles. Depreciation pressure for the yuan is still a big concern
Hong Hao, managing director and chief strategist at Bocom International

“Lower interest rates could spur asset prices even higher and cause asset bubbles,” said Hong. “Depreciation pressure for the yuan is still a big concern.”

China Merchants Securities also thinks the yuan’s foreign exchange rate and China’s asset prices are holding back the PBOC from making an RRR cut, according to its research note.

“Any RRR cut could increase liquidity significantly, push down interest rates and create a strong expectation of policy easing, adding further pressure on the yuan, and leading to another decline in China’s foreign exchange reserves,” according to its note.

A Reuters poll last Wednesday shows analysts believe the yuan may have fallen more than 3 per cent against the dollar a year from now, more than expected just a month ago, as the economy struggles to maintain momentum and as the dollar edges up on expectations of an eventual US rate hike.

China’s foreign exchange reserves continued to decline in July, down by $4.1 trillion to $3.2 trillion, after a surprise rebound in June, according to the data released by the People’s Bank on China.

Increasing inflationary pressure is limiting the PBOC to resort to further monetary easing measures, according to Everbright Securities’ latest report.

“Although the consumer price index in still falling, the decline in the PPI is decelerating.

China’s CPI rose 1.8 per cent in July from a year earlier, slower than a 1.9 per cent rise in June.