China’s surging pork prices leave limited leeway for interest rate cut to support growth

Surging pork prices pushed China’s consumer price index to a nearly eight year high, making the central bank reluctant to act even as the economy slows further

China is also not giving up its deleveraging programme to reduce debt and risky lending, limiting funding to consumers and small businesses

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Chinese banks extended US$94.5 billion in new net loans in October. Photo: AP

Published: 7:45pm, 12 Nov 2019Updated: 5:06pm, 17 Nov 2019

Fears of exasperating already rapidly rising consumer prices are limiting the options for Chinese policymakers to make aggressive rate cuts and implement other monetary policy easing even as the economy continues to worsen, analysts said.

Surging pork prices pushed China’s consumer price index (CPI) to a nearly eight year high in October, while the headwinds for China’s economic growth are continuing to build as seen in weakening in the export, industrial and property sectors.

Policy easing space is also limited by other factors, analysts said, as lowering interest rates sharply could have the unwanted effects of fuelling capital outflows and deterring foreign investment, while also undermining the government’s campaign to cut back on risky lending within the financial sector.

On Monday, government data showed that Chinese banks extended 661.3 billion yuan (US$94.5 billion) in net new loans in October, the lowest monthly total this year and well below expectations of 800 billion yuan. Total aggregate financing stood at 618.9 billion yuan, below forecasts of 950 billion yuan.

Overall, China’s absolute total debt level continues to rise, reaching 303 per cent of gross domestic product (GDP) at the end of the first quarter, according to data from the Institute of International Finance.

Trivium China, a Beijing-based China policy analysis firm, said comments by Zhou Liang, vice-chairman of the China Banking and Insurance Regulatory Commission on Sunday, clearly indicated that de-risking efforts would continue, whether financial institutions “like it or not.”

More pain may be also on the cards for China’s economy as the central bank takes small, incremental policy easing steps. Last week, the People’s Bank of China (PBOC) cut the one-year rate on its medium-term lending facility (MLF) – which is uses to add low-cost liquidity to the banking system – by only 5 basis points to 3.25 per cent, which is unlikely to have a significant effect on the economy.