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China economy

How late will China be to the US Federal Reserve-led interest rate-raising party?

The People’s Bank of China is unlikely to jump on the US Federal Reserve-led bandwagon of interest rate hikes any time soon, analysts said

PUBLISHED : Tuesday, 14 November, 2017, 10:07am
UPDATED : Tuesday, 14 November, 2017, 10:46pm

The People’s Bank of China is unlikely to jump on the US Federal Reserve-led bandwagon of interest rate hikes any time soon, even though the Bank of England last week raised rates for the first time in more than a decade and a few Asian central banks are openly flirting with the idea, analysts said.

China’s central bank has left its benchmark deposit and saving rates unchanged for the last two years, regarding policy rates as an option to be used only sparingly. The PBOC is opting for nimbler tweaks to areas such as daily open market operations to influence the price of money.

However, pressure is likely to build on Beijing to do something more dramatic on the interest rate front than selling and buying repurchase agreements if other central banks, including those in Asia, speed up the “normalisation” process.

“It’s highly likely to see the first rate hike by an Asian central bank within this year,” said Zhou Hao, chief emerging markets economist at Commerzbank in Singapore. “South Korea and Philippines are two forerunners.”

At the same time, China won’t rush to touch its policy rates because the benchmark rates have lost their meaning for China’s banks and economy thanks to the country’s interest rate liberalisation moves of the past decade, Zhou said.

“China has proved that it can achieve policy goals without changing benchmark rates,” Zhou said.

Even without a change in policy rates, the central bank has enough tools to adjust the benchmark rates.

Why the Fed is likely to raise interest rates faster than you think

Under Zhou Xiaochuan, the Chinese central bank governor who has been in office 15 years, China has created an interest rate corridor system with a group of new liquidity tools, including the standing lending facility and medium-term lending facility, to set prices.

Chinese savers are turning to wealth management products or even online products to seek higher rates than the 1.5 per cent for one-year benchmark rate. For banks and their clients, banks are now encouraged to set prices on their own, making the traditional government fixed policy rates irrelevant.

Ding Shuang, chief China economist of Standard Chartered Bank, said the PBOC is expected to continue its small and flexible steps in adjusting liquidity and market rates, until the Fed announces much a larger than expected rate hike in December or reduction of its balance sheet.

“It could be a further hike of reserve repo rate, or that of medium-term lending facilities,” Ding said.

Nomura chief China economist Zhao Yang said Beijing is in no hurry to follow the Fed in raising rates as it hopes to demonstrate independence in its monetary policy.

More importantly, China’s economic fundamentals contain no call for a policy interest rate hike, Zhao said.

While consumer inflation in China is gaining speed, it is still within the government’s target, and China still worries more about weak growth than overheated development at the moment, making a policy rate hike unreasonable, analysts said.

A tale of three US Fed misfits and the growing wealth gap

According to China’s central bank law, a policy rate change is a decision to be made by the State Council, the cabinet. That means an increase in China’s deposit or lending rate won’t take place until Beijing starts to worry about inflation or runaway growth. China’s last interest rate hike came in July 2011.

China’s patience on interest rates aligns it with the European Central Bank, which essentially decided last month to keep rates at zero till the end of quantitative easing, and the Bank of Japan, which is committed to keeping long-term interest rates at zero until there are clear signs that deflationary pressure is ending.