China Economy

Is there a PBOC “put” in the making?

David Llewellyn-Smith
Wednesday, 26 November 2014
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From Reuters:

China’s central bank will wait until fourth-quarter economic data is out and monitor U.S. and Japanese monetary policy before considering any more rate cuts or easing, a central bank adviser said on Tuesday.

The People’s Bank of China surprised the markets by cutting rates last Friday for the first time in more than two years to help stabilize the world’s second-largest economy. Reuters then reported that China was prepared to ease policy again.

“Regarding the next step, whether to cut rates again or take similar action, we still need to look at the fourth quarter’s macroeconomic index,” said Chen Yulu, who sits on the central bank’s monetary policy committee. He was speaking on the sidelines of an economy and finance forum in Beijing.

“It is also important to make decisions taking into account Japanese and U.S. monetary policy,” Chen said.

That’s doesn’t sound like no more cuts to me. It sounds like data dependent cuts, a la the FOMC. Having said that, Q4 data is not until January and the PBOC appears to be responding to press speculation, not getting ahead of it, so I’m probably over-reading the situation. It’s worth watching given any PBOC “put” would put more pressure on the Aussie and support iron or at the margin.

Meanwhile, Goldman reckons no, from Forexlive:

In the wake of Friday’s People’s Bank of China (PBOC) rate cut, Goldman Sachs think the central bank is more likely to use further liquidity injections instead of additional rate cuts.

In summary from GS (HK research):

  • PBOC wants to maintain growth at “lowest possible cost” in terms of risk of excess liquidity
  • PBOC’s rate cut having limited impact on growth
  • Expects PBOC to push down interbank interest rates through more “nimble” market injections (eg, , such as medium-term lending facility (MLF) as the primary policy option … medium-term is around 3 months or so)

Other measures expected:

  • Expansion in loan quotas
  • Easing in regulations

GS don’t see further interest-rate cuts in near term; says household disposable income would be compromised, and there would be risk of greater pressure on deposit outflows.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.