By Iris Ouyang
China could maintain a policy rate this week and make liquidity abundant when a policy loan matures, maintaining accommodative conditions to promote a patchy economic recovery and an increase in debt sales.
The People’s Bank of China will leave the interest rate on its medium-term loans unchanged at 2.5% on Monday, according to all 19 analysts surveyed by Bloomberg. The central bank will also roll over the 170 billion yuan ($23.5 billion) special loan, according to the average estimate of eight analysts who forecast the volume.
The PBOC could forego new stimulus given recent economic growth, including improved production and consumption, while also facing constraints from the widening interest rate gap between the US and China. That said, the country may still need to adopt a more accommodative policy later this year as China’s recovery remains uneven due to renewed export weakness and ongoing housing market problems.
The Federal Reserve’s eventual shift toward dovish policy, expected this year, could also prompt Beijing to cut borrowing costs to push through a flood of government debt issuance to finance growth.
“In the near term, the PBOC would focus more on cuts in bank deposit rates and/or reserve requirements to reduce banks’ liability costs, rather than on MLF rate cuts, mainly due to yuan and capital flow considerations,” said Xiaojia Zhi. head of research at Credit Agricole CIB Hong Kong Branch, adding that liquidity remains “flush”.
The yield on a seven-day benchmark loan in China’s interbank market stood at 1.83% on Friday, down from this year’s high of 2.01% reached on March 27.
Liquidity is ample because sovereign debt maturities are relatively long and loan demand in April is generally modest, countering pressure from new bond issuance and seasonal tax payments, said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.
Despite the expected calm from the PBOC’s near-term policies, a stalled rally in Chinese government bonds could resume in the coming months as investors remain adamant that new monetary easing will come later in the year.
“Even if MLF rates are kept unchanged, the market is likely to expect some easing,” said Frances Cheung, strategist at Oversea-Chinese Banking Corp in Singapore. “A combination of fiscal and monetary measures will maintain an increasingly steepening trend toward the Chinese government bond curve.”
An impressive rise in Chinese government debt has been showing signs of fatigue since last month, amid concerns about the slow pace of policy easing and higher debt supply, including a planned 1 trillion yuan ultra-long special government bond this year.
According to some observers, the coming increase in government bond sales is one reason why policymakers will have to make financing even cheaper over time.
“At this point in the cycle, lower yields on Chinese government bonds are needed to support the economy,” said Marco Sun, chief financial market analyst, global markets division for China at Mitsubishi UFJ Financial Group Bank (China) Ltd. the 10-year bond will fall 20 basis points in June.
Here is this week’s key Asian economic data:
Monday, April 15: China 1-year MLF, Japanese nuclear machine orders, Philippines overseas remittances, India’s trade balance
Tuesday, April 16: China 1Q GDP, industrial production, retail sales and fixed assets ex-national
Wednesday April 17: New Zealand 1Q CPI, Japan trade balance, domestic exports excluding Singapore oil
Thursday April 18: Australian employment and business confidence in the first quarter, BOJ’s Noguchi speaks
Friday, April 19: Japan CPI, Malaysia’s trade balance and GDP for the first quarter
First print: April 14, 2024 | 7:32 PM IST