Pedestrians walk past the People’s Bank of China headquarters in Beijing, China, on Monday, Jan. 7, 2019.
Giulia Marchi | Bloomberg | Getty Images
Overnight, markets took Fed Chairman Jerome Powell’s comments during the first of a two-day Congressional testimony as affirming expectations for easier monetary policy in the U.S. The S&P 500 briefly topped 3,000 for the first time, and Treasury yields edged lower.
A looser monetary policy environment would reduce pressure on China’s central bank to ease monetary policy. Amid trade tensions with the U.S., China’s economy has struggled to gain momentum.
Private surveys released last week by Caixin showed services activity fell in June to its lowest since February, and the manufacturing sector contracted, after three months of expansion.
Among several measures to support the economy over the last several months, the People’s Bank of China (PBoC) has made targeted attempts to lower financing costs to privately run enterprises, which account for the majority of the country’s economic growth and employment.
“If the Fed does go ahead and cut rates, which I don’t think is a given … it simply means the PBoC has a little breathing room to see if the policies it has implemented have an impact on the real economy,” Hannah Anderson, global market strategist at J.P. Morgan Asset Management, told CNBC on Thursday by phone.
The central bank will also face less pressure to allow the yuan to depreciate, making it easier to maintain a goal of keeping the exchange rate stable, she said, while higher Treasury prices would boost the paper value of the PBoC’s holdings, increasing confidence.
The U.S. dollar index fell about 0.4% overnight amid Powell’s comments. The People’s Bank of China set the mid-point of the yuan mildly stronger against the greenback on Thursday at 6.8677.
Some analysts expect if the Fed cuts rates, it will go so far as to prompt China’s central bank to take similar action.
“If (make that when) the Fed cuts rates then it’s quite likely the PBOC will follow suit,” Leland Miller, chief executive officer of China Beige Book, said in an email. The firm publishes a quarterly review of the Chinese economy based on a survey of more than 3,300 Chinese firms.
“But a benchmark interest rate cut is almost purely a symbolic move that won’t affect most corporates,” Miller said. He noted that “only a small subset of (state-owned enterprises) pay the benchmark rate, and most of those firms don’t have to repay their loans anyway.”
A Reuters poll released on Wednesday showed economists anticipate the People’s Bank of China will keep its benchmark rate unchanged this year, while reducing banks’ reserve requirement ratio twice in the second half of this year.
While easing monetary policy would help support growth, Beijing has also turned to fiscal tools such as tax cuts to boost the economy in the latest round of stimulus.
However, Larry Hu, chief China economist at Macquarie, said he does not expect the Chinese central bank to follow the Fed in cutting the benchmark interest rate, since economic data doesn’t indicate enough of a slowdown to warrant a major policy change right now.
“In the US, it’s significant for the Fed to cut rate(s),” Hu said in a note Wednesday. “But in China, stimulating infra(structure) and property … is what really matters.”
Instead, he anticipates policymakers will wait until the fourth quarter to possibly cut the benchmark rate, or take some similar action. China’s benchmark 1-year lending rate has stayed the same since 2015, Hu noted.
Reuters’ poll showed China’s economic growth is expected to slow to a 29-year low of 6.2% this year, amid uncertainty from the ongoing trade dispute with the U.S.