MacroscopePeople’s Bank of China may be turning dovish, but investors should not bet on major stimulus in 2020

As investors await concrete signs of progress on US-China trade talks, several loosening signals from China have helped to support market sentiment.

On November 5, for the first time since early 2016, China’s central bank lowered a key quasi-policy rate, the one-year medium-term lending facility (MLF) rate, by 5 basis points. This was followed by a 5-basis-point reduction in both the seven-day reverse repo rate and the new benchmark loan prime rate (LPR) based on the MLF rate on November 18 and 20 respectively.

While the magnitude of the rate cuts is small, they helped to ease market concerns that the People’s Bank of China is constrained from delivering further monetary stimulus as China’s consumer price index rose above the government’s 3 per cent year-over-year target.

The more dovish policy shift was also underscored by the recently released third-quarter monetary policy report. In the report, the central bank acknowledged that the Chinese economy is facing stiffer growth headwinds, reiterated its policy focus on maintaining stability and de-emphasised the need to keep money supply under control.