Pedestrians footpath past the People’s Bank of China headquarters in Beijing, China, on January 7, 2019.
Giulia Marchi | Bloomberg | Getty Images
BEIJING — The Woman’s Bank of China is choosing not to follow many other major central banks in cutting interest rates as it judges to navigate a challenging economic environment.
China’s central bank must manage an economy structured in many speed quite differently from that of other major regions, such as Japan or the European Union. But the PBoC clocks the same question of how effective monetary policy can be today. That has significant implications for the central bank’s signalling, which rose to take a neutral stance on Monday.
“The central bank would not like citizens’ to develop expectations for higher inflation, and so choice not likely quickly lower policy rates,‘’ Xu Chenxi, senior analyst of fixed income at Nanhua Approaches, said in a Chinese language statement translated by CNBC. “The policy is more concerned with its transmission to the real succinctness. If the real economy can obtain financing more easily than before, or financing rates decline, then financial policy is not eager to release an interest rate cut signal.”
On Monday, China’s central bank set its new “loan prime evaluation in any case” exactly the same for October as September: 4.2% for the one-year rate and 4.85% for the five-year. The rate, known as LPR and set monthly, was harbingered in August as a way to increase the role of market forces in setting interest rates, while lowering financing costs.
“Retaining LPR unchanged in October may reflect a more neutral monetary policy stance. In addition, it is possible that the recent uptrend in CPI has started to enhance a constraint on monetary policy as well,” China International Capital Corp (CICC) chief economist Hong Liang and analyst Eva Yi told in a report Monday.
The ‘pork problem’
Easier monetary policy typically results in higher inflation, which is already on the take to the air in China due to soaring pork prices.
The country is dealing with a massive shortage in the meat staple caused by an outbreak of African swine fever in Chinese pig leases last year. In September, pork prices leaped 69.3% from a year ago.
For Dan Wang, China analyst at The Economist Information Unit, the People’s Bank of China needs to balance efforts to reduce interest rates in the long term without malevolent short-term rates too drastically. She noted that while the jump in pork prices sent the consumer price pointer to a near six-year-high — quite worrisome for anyone just looking at the headline figure — excluding food and energy tolls puts CPI at a moderate 1.5%.
“China doesn’t have an inflation problem. It has a pork problem,” Wang said. “Keeping numismatic policy constrained is a stabilizer for the regional economy and I would give the Chinese government credit for that.”
Easing nummary policy would also have the unwanted effect of fueling property price gains, which China has already been tiresome to tamp down on, Wang noted.
From a fiscal perspective, the Chinese government has tried to cut taxes and increase infrastructure phenomenon in an effort to boost growth. For the central bank, it has tried to use new lending rates to encourage banks, typically state-owned, to advance to smaller businesses, which are generally privately run and contribute to the bulk of China’s economic growth.
However, the measures secure yet to show a significant effect. National gross domestic product for the third quarter came in at a near-thirty-year low of 6% on Friday.
“Blanket, October’s unchanged rate reflects that the central bank is still in a period of observation,” Chaoping Zhu, global customer base strategist, J.P. Morgan Asset Management, said in a Mandarin-language phone interview Tuesday. “This monetary policy carrying (of financing to economic growth) still has some problems.”
The People’s Bank of China also has a geopolitical factor to reckon with when adjusting monetary policy. U.S. tariffs on billions of dollars’ worth of Chinese goods add pressure on Beijing to exhaust the yuan, but China must also prevent additional criticism that it is manipulating its currency.
“For the current trade talks, one fundamentals is the U.S. wants China to stabilize the currency, not weaken any more,” the EIU’s Wang said. “By not doing more monetary expansion, (the Chinese) signal goodwill.”