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Central bank’s ‘tremendous room’ to adjust policy may be put to test as China’s economy slows
- It’s increasingly likely the People’s Bank of China will ease policy later this year given signs growth is slowing due to trade war pressure, analysts say
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The boast by People’s Bank of China governor Yi Gang this month that he has “tremendous room” to adjust policy could soon be tested as the economy slows, throwing attention on the impact on the nation’s fragile currency and financial markets.
Compared to European and Japanese peers, China does have more obvious policy space. Its benchmark one-year lending rate has stayed at 4.35 per cent since 2015, far above zero. The Federal Reserve’s dovish turn also eases the depreciation pressures on the yuan, leaving Yi even more room for manoeuvre.
Yi may be looking at his toolkit more carefully after data released on Friday showed industrial output growth in May slowed to the weakest pace since 2002, highlighting headwinds from the trade war with the US. Production slowed across the board even as solid readings for property investment and retail sales suggest some measures to cushion the slowdown are filtering through.
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“Policymakers always have room but they need to ask themselves ‘at what cost?’” said Rob Subbaraman, head of emerging markets economics at Nomura Holdings in Singapore.
“Easing monetary policy aggressively could come at the cost of a yuan depreciation overshoot or another debt-fuelled property market bubble.”
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