The US Federal Reserve appears to have slowed down its pace of rate hikes, thus easing the downward pressure on the Chinese renminbi.
With no need to support the currency, the People’s Bank of China has shown no sign of tightening in recent open market operations.
State media reports also indicate that the monetary policy should not be tightened further in the second half, and the Chinese central bank should try to reduce the funding cost for corporates.
China’s monetary policy has been shaped by two contrasting forces in the first half.
On the one hand, Fed’s tightening policy has prompted China to follow suit to support its currency. On the other, authorities fear an overly tight monetary policy could hamper economic growth.
So the Chinese central bank made the hard decision of draining capital through reverse repos. As a result, the Shanghai interbank offered rate (Shibor) once hit the highest since the second half of 2015. And the one-year Shibor rate even exceeded the one-year benchmark rate.
Consequently, the Chinese commercial banks raised mortgage loan rates. Chinese property developers have also encountered difficulties in raising funds. Many companies have to postpone or cancel bond issuances as well in light of rising borrowing costs. It’s shown that corporate debt issuance fell by about 350 billion yuan (US$51.89 billion) in the first five months of this year.
For the second half, however, things may be a bit different.
As Fed’s tightening pace is slowing, offshore renminbi has strengthened to the highest level against the greenback since October. Higher rates are no longer needed to support the Chinese currency. That means China now has more leeway in its monetary policy.
The next question is to what extent the central government intends to press ahead with financial deleveraging, which has been outlined as one of the key tasks for the rest of this year.
Financial deleveraging does not necessarily mean tighter monetary supply as indicated by the central bank report in April.
In fact, PBoC-affiliated media urged the government to stabilize or even cut interest rates in the second half.
As such, the chance for further policy tightening in the second half is very limited.
What about an easing of the policy? It depends on whether there is a need to lower rates to prop up growth.
Efforts at financial deleveraging and reducing corporates’ funding costs are contradictory. One way to do it is for the PBoC to target some high-risk sectors like property in order to deepen deleveraging while adopting a more accommodative approach to sectors the authorities want to promote.
This article appeared in the Hong Kong Economic Journal on July 28
Translation by Julie Zhu
[Chinese version 中文版]
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