The People’s Bank of China (PBOC) might soon deliver the much-anticipated monetary stimulus, thanks to developments in global financial markets. Recently, China’s central bank reduced interest rates unexpectedly, potentially marking the beginning of what economists expect could be three such cuts in 2024. This easing would be on a scale not seen in years. A crucial factor is the anticipated aggressive rate cuts by the US Federal Reserve due to recession fears, which would provide the PBOC more flexibility to lower rates without exacerbating capital outflows or undermining the yuan.
Investors, including Xu Yongbin of U-Shine Private Equity FD Mgt Co., predict the PBOC could lower rates one to two times this year, possibly starting as early as September. Previously, Chinese policymakers maintained steady rates to defend the yuan, awaiting the Fed’s rate reductions. With US yields declining due to a Treasury market rally, the pressure on the yuan has lessened, and traders are anticipating significant Fed easing by year-end.
This shift gives China’s central bank an opportunity to stimulate the economy amid weakened yuan and concerns over growth prospects. Analysts believe the PBOC might act within weeks, with Macquarie Group Ltd. forecasting at least two rate cuts in 2024. The central bank’s recent reliance on short-term rates as a policy tool indicates a strategic shift.
Economists from Bloomberg suggest that diminished concerns over yuan depreciation—if validated by substantial US rate cuts—would enable the PBOC to lower rates further, aiding China’s economic recovery. Despite previous moderate rate reductions failing to boost borrower confidence amid a persistent housing downturn, larger cuts could mitigate debt burdens and encourage spending.
However, the PBOC must navigate challenges such as narrow profit margins for commercial lenders and the limited impact of prior cuts. Ultimately, the central bank’s decisions will hinge on China’s domestic economic needs. In severe global recession scenarios, the PBOC could face reduced flexibility due to strengthened dollar fears.
Standard Chartered’s Ding Shuang maintains a forecast for a 10-basis point cut to the seven-day reverse repo rate later this year and into early 2025, with potential larger cuts to the one-year policy loan rate. He suggests that if China’s property sector stabilizes next year, domestic demand might normalize, allowing China to chart its own path independent of US rate moves.
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Original Story https://www.livemint.com/news/fed-moving-aggressively-on-rate-cuts-may-spur-pboc-to-ease-more-11723069173583.html
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