China’s slowing economy won’t push it into joining the global rate-cutting cycle. Here are three reasons why

Concern over capital outflows, the need to deleverage and Beijing’s independent monetary policy mean the PBOC won’t cut rates, even as economic worries encourage other central banks to do so

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Yi Gang, governor of the People's Bank of China, talks during an interview in Beijing on June 7. Due to the priority Beijing places on deleveraging, few analysts anticipate that the PBOC will join the global trend of policy easing. Photo: Bloomberg

Hao Zhou

Hao Zhou currently serves as a senior economist (emerging markets) with Commerzbank.

Published: 2:00pm, 6 Aug 2019Updated: 10:24pm, 6 Aug 2019

A global easing cycle is on the way, and China is apparently a key reason behind the new global slowdown. There are many reasons to be bearish about China’s outlook, including the trade war, its debt pile and asset bubble concerns. However, it seems that few analysts believe China’s central bank will soon follow others in cutting its benchmark interest rates. So, why is there a big divergence between China’s monetary policy and the economic outlook?

Some may argue that the People’s Bank of China has already eased its monetary policy stance by lowering the reserve requirement ratio and introducing its “targeted medium-term lending facility”. However, quantitative measures could be more effective if accompanied by tools such as policy rate cuts.

Some also note that the Shanghai Interbank Offered Rate (Shibor) has dropped significantly since the start of the year. For instance, the three-month Shibor rate was roughly 3.35 per cent at the beginning of the year, and had fallen to 2.65 per cent at the end of July, which should have reflected monetary policy easing.

Nonetheless, in banking, the vast majority of corporate and household loans are benchmarked to the PBOC’s policy lending rates, rather than the Shibor. The Shibor, instead, is an indicator of interbank liquidity conditions, which is not used widely by commercial banks to price loans.

China is mulling replacing the current benchmark interest rate mechanism with a new system called the loan prime rate (LPR), in a bid for a more market-oriented interest-rate regime. That sounds reasonable at first glance. The LPR is the commercial banks’ loan rate provided to their best customers, and other loan rates are based on it.

At this stage, the quotation group for the LPR consists of 10 big Chinese commercial banks. While it looks like a good idea, the actual movements of the LPR echo those of the benchmark lending rates, that is, the one-year lending rates.