Fed approach gives China central bank more breathing space
- With two, not three, rate increases hinted at next year by the US institution, the People’s Bank of China has extra room to manoeuvre during the trade war
Global markets may have reacted badly after the US Federal Reserve’s latest rate rise, but Hong Kong and the mainland can take moderate comfort. As expected, the Fed raised borrowing costs for the fourth time this year by 25 basis points to a range between 2.25 per cent to 2.5 per cent. While the move had been well-advertised, leading stock markets around the world duly plunged, including the Hang Seng Index in Hong Kong. Investors were less concerned about the rise itself than the changing pace of rate increases – from three quarter-point rises to two – being hinted at by the Fed next year. It is apparently still not moderate enough for many.
Previous investor exuberance has given way to caution and even pessimism, so the Fed’s signal of treading carefully in the face of the US-China trade war and Brexit has become another piece of bad news to the ongoing market correction into bear territory. The flattening yield curve, when the yield of benchmark longer-term Fed rates approaches that of shorter-dated rates, has also been taken as a sign of economic headwinds ahead for the US economy.
In Hong Kong, though, thanks to ample liquidity, most banks are not raising their lending rates. This is despite the same rise of 25 basis points by the Hong Kong Monetary Authority in lockstep with the Fed on the basis of the US dollar peg. Mortgage rates will remain low, and may rise slower than expected next year. This will come as a relief to homeowners, but given the softening sentiment, the cooling-off in the property market is likely to continue.
On the mainland, some pundits have argued China’s central bank is being hemmed in by higher US interest rates, which limits its ability to ease monetary policy to support a slowing economy. Perhaps, but not necessarily. The People’s Bank of China has introduced a new instrument to provide low-cost funds to qualified commercial banks to encourage more lending. Called a Targeted Medium-Term Lending Facility, it is widely seen as another way to lower borrowing costs. The central bank has also increased commercial banks’ quotas for lending to small companies and private enterprises by 100 billion yuan (HK$114 billion) as part of Beijing’s promise to help private businesses hit hard by the trade war.
Some have argued the Chinese central bank is constrained as it cannot risk monetary policy divergence from the Fed that could exert significant pressure on the yuan to depreciate. That is why it stopped short of an outright rate cut and also limited the new facility to select banks in targeting smaller private firms. This is true to an extent, but if the Fed were to go full steam ahead in its campaign to “normalise” rates, China’s central bank would have even less room to manoeuvre. Now, it will have more breathing space.