Chinese PBOC Leads Fed In Withdrawing Economy From Stimulus
China’s central bank is ahead of its US counterpart in containing its emergency Covid-19 stimulus measures, easing potential market pressure from the Federal Reserve’s impending policy change.
The People’s Bank of China has already started to curb credit growth to deal with debt risks, although it is doing so gradually to avoid blocking the still uncertain economic recovery. Consumer inflation also remains contained despite the recent soaring factory prices.
It’s a different backdrop to the United States, where record fiscal stimulus is rising growth projections and prices are increasing faster than expected. The Fed is now debate when it can start cutting its bond buying program and possibly start raising interest rates.
Unlike the previous US tightening cycle, when interest rates in China also rose, in part to allay fears of capital flight, this time around, capital poured into China. And while the yuan may weaken as the Fed shrinks – which brings welcome relief to exporters and the PBOC – the impact will likely be mitigated.
“China follows its own policy due to very different growth and inflation compared to the United States,” said Dariusz Kowalczyk, head of research for Asia, excluding Japan, at Crédit Agricole CIB at Hong Kong. “The Fed’s policy change puts upward pressure on the volatility of the global foreign exchange market, and the PBOC would also welcome it if the dollar-yuan exchange rate is affected as well.”
Beijing had repeatedly signaled that the yuan’s rise against the dollar had been too fast as it hit its highest level since 2018 in May. While the onshore yuan has fallen 1.2% since the Fed’s surprise hawkish turn, it is still up 0.9% this year as Asia’s second best-performing currency.
Chinese high yield markets remain attractive to global investors, which could help keep the yuan stronger against its peers. Although US rates surged on the Fed’s signal, Chinese 10-year sovereign bonds are still yielding around 1.6 percentage points more than T-bills of the same duration. Inclusion of certain government debt in FTSE Russell’s flagship global debt index will also help support the influx.
The PBOC has started signaling an abandonment of stimulus measures late last year, when the rest of the world was still struggling to recover from deep recessions. Officials have repeatedly expressed concerns about rising debt and asset bubbles, pledging to stabilize debt ratios while avoiding any “Brutal turn” in politics.
“Even at the start of the actual Fed downsizing, the PBOC will likely continue to follow its own political pace as it has already started to normalize,” said Ding Shuang, chief economist for Greater China and North Asia. at Standard Chartered Plc in Hong Kong. The easing of the yuan is “ideal” for Beijing, he said.
While few economists expected the PBOC to raise interest rates this year, some who saw a small window of tightening, such as Wei Yao and Michelle Lam of Societe Generale SA, say it is closing now. . A growing analyst camp has started Downgrading their growth forecasts after a series of weaker-than-expected economic data recently, particularly from the consumer side.
What Bloomberg Economics Says …
“The yuan appreciation wave may have turned following the recent hawkish Federal Reserve announcement,” Bloomberg Economics’ Chang Shu said. Even so, an increase in business demand in May – a first this year – suggests that there is still support for the yuan – limiting the possibility of rapid depreciation.
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When it comes to short-term market rates, the PBOC is also signaling its willingness to provide enough liquidity to keep borrowing costs from climbing. On Thursday, the PBOC increased its injection of short-term liquidity for the first time since March, a marked change in its approach to liquidity management after months of providing the minimum to meet market demand.
Liquidity concerns will become more of a factor in the second half of the year, as local governments are likely to step up bond sales, having so far sold only around 30% of their quota for the full year.
“We don’t think a more hawkish Fed would affect China’s policy,” Robin Xing and other Morgan Stanley economists wrote in a note. “Instead, there could be an adjustment in the political stance on tightening at the July Politburo meeting given the recent growth hitch.”
– With the help of Yinan Zhao, Livia Yap and Yujing Liu