China’s central bank to stick to its guns by lowering interest rates despite soaring pork price, analysts say

13-Sep-2019 Intellasia | South China Morning Post | 6:02 AM Print This Post

China’s central bank will stick to its guns to lower interest rates and boost bank liquidity to encourage more lending and support the economy despite skyrocketing pork prices across the country, analysts said.

While the surge in pork prices up 46.7 per cent in August compared to a year earlier has fanned public discontent and jumped to the top of Beijing’s policy agenda, overall Chinese inflation remains under control, with the August headline consumer price index remaining stable at 2.8 per cent, below the government’s full-year target of 3 per cent.

Data released by the People’s Bank of China (PBOC) on Wednesday showed that outstanding bank loans at the end of August rose 12.4 per cent from a year earlier, decelerating from 12.6 per cent at the end of July and 13.2 per cent in August 2018, in a sign that Beijing’s monetary easing efforts to date have not been sufficient to bolster growth.

In the face of weak economic growth and subdued domestic inflation, as well as expectations for further monetary easing by the US Federal Reserve and European Central Bank later this month, China’s central bank is set to go further on its monetary easing path by lowering the new loan price rate to reduce the cost of borrowing as well as pump more liquidity into the market to give banks more money to lend, analysts said.

Liu Xuezhi, a senior researcher with the Bank of Communications, the country’s fifth largest lender by asset size, said that the central bank’s hands will not be tied by the outlook for inflation even if pork prices continue to rise in the coming months.

In addition, the producer price index fell further into negative territory in August, meaning factories are having to discount their products to sell them to wholesalers and retailers.

Core inflation [excluding food and energy] is trending lower, while the continuous drop in producer inflation reflects insufficient demand [due to the weak economy]

Liu Xuezhi

“Core inflation [excluding food and energy] is trending lower, while the continuous drop in producer inflation reflects insufficient demand [due to the weak economy],” Liu said.

The hefty rise in the price of pork, which accounts for less than 3 per cent of the basket of goods used to calculate China’s consumer price index, is due to the supply shock resulting from the African swine fever epidemic, and not for any excesses of monetary policy, Liu added.

Given weak growth, China must lower interest rate levels for manufacturers and factories, he added.

Core inflation in the world’s second largest economy, which excludes some volatile and seasonal factors, grew 1.5 per cent in August, down from 1.6 per cent in July. The producer price index, however, was negative for the second straight month, down 0.8 per cent.

In its monetary policy report released last month, the PBOC said the country’s overall price levels were stable. Last week, it also announced the third cut of the bank’s required reserve ratio the amount of money banks must hold in reserve at the central bank freeing up $126 billion worth of funds that banks can lend.

Larry Hu, the chief China economist at Macquarie Capital in Hong Kong, said that the credit data in August suggests that “the current stimulus is not enough to stabilise the economy”, so China needs to escalate its efforts to cope with looming “growth headwinds” in the coming months.

Beijing has recently augmented its pro-growth measures to cushion the impact of the trade war with the United States, including bringing forward next year’s local government bond issuance quota to this year to ensure continued strong infrastructure spending.

But growth has remained sluggish as measured by fixed-asset investment and industrial output.

Zhang Ming, a senior researcher with the Chinese Academy of Social Sciences, said that the major threat to the Chinese economy “is not inflation, but the fall of demand”.

“The Chinese government should enhance countercyclical adjustment,” Zhang said.

Ren Zeping, the chief economist for Chinese property developer Evergrande, said that the risks of deflation outweighed those of inflation despite headline-grabbing pork prices.

“It’s time to cut [interest] rates,” Ren wrote.

The market is expecting the central bank to lower the rate in its medium-term lending facility (MLF) which is uses to provide extra liquidity to the banking system on Tuesday, when the central bank will have to roll over 265 billion yuan (US$37 billion) in MLF loans.

However, there is possibility that the central bank could keep its powder dry for a few more weeks before lowering interest rates due to concerns about the effect of lower rates on overall debt levels and home prices.

Economists at Barclays, led by Chang Jian, said on Wednesday that China could undertake “more targeted” credit easing measures in the near term, thereby postponing a cut in interest rates until early November.


Category: China

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