China refrains from policy rate cut, defying market expectations once again

·3-min read

China’s central bank refrained from lowering a key policy rate on Wednesday, falling short of market expectations again and missing another window of opportunity on a key policy rate change to cushion the nation’s economic slowdown amid the US’ progressive rate-hike plans.

The People’s Bank of China kept the interest rate of one-year medium-term lending facility (MLF) loans unchanged at 2.85 per cent for the past five months, after the previous cut from 2.95 per cent in January.

Some 200 billion yuan (US$29.7 billion) worth of one-year MLF loans – a key tool used by the central bank to release medium-term liquidity into the interbank market – matured and rolled over on Wednesday. Any rate cut on it would have been viewed as a clear signal to boost the economy.

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“China’s monetary policy is now in an observation period when a variety of domestic stabilisation measures are being implemented and the US Federal Reserve plans to have fast monetary tightening. Keeping the MLF rate unchanged will help strike a balance between domestic and external conditions,” said Wang Qing, chief macro analyst with Golden Credit Rating.

“Meanwhile, the current market liquidity is slightly higher than the reasonable ample level. There’s no need to increase the size of the facility,” he added.

The decision came ahead of the US Federal Reserve’s interest rate meeting on Thursday, with the market expecting the Fed to raise interest rates by at least 50 basis points to tame soaring inflation, and with more aggressive moves in the pipeline.

Economists have said that benign inflation at home, along with the return of capital inflows last month, warranted a cut in the interest rate to support economic growth, and some said this could be the last opportunity for China’s central bank this year.

Zhang Ming, deputy director of the institute of finance at the Chinese Academy of Social Sciences, said China’s consumer inflation is at an overall controllable level of 2.1 per cent but could be driven up by a rebound in the price of pork and foodstuffs in coming months.

“There is a time window – about half a year – to have monetary policy loosening,” he said on Tuesday evening at a webinar organised by Tsinghua University’s Academic Centre for Chinese Economic Practice and Thinking.

Meanwhile, “as there’s no big room for the US dollar index to rise, the yuan exchange rate could stay in a range of 6.6-6.9 against the greenback in the second half of this year. It’s unlikely to see a large-scale depreciation”.

‘All we can do is spend less’: inflation isn’t China’s problem, income is

Chinese economy improved marginally in May, when Premier Li Keqiang released a 33-point rescue package and ordered local cadres to thoroughly implement the measures to avoid an economic contraction in the second quarter.

However, monthly retails sales remained negative last month, indicating that there is still a long way to go to achieve the country’s ambitious growth target of “around 5.5 per cent”.

Yuan Gangming, a researcher with the Tsinghua University Academic Centre, said the market expects more substantial monetary changes after the increase in money supply growth and lending figures last month.

“A key target of monetary policy should be maintaining necessary economic growth,” he said at the same webinar. “Policy adjustments should continue at a faster pace.”

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