PBOC unswayed by US Fed as policy choices hinge on data at home

[BEIJING] People’s Bank of China (PBOC) governor Pan Gongsheng said that any changes to monetary policy will be guided primarily by domestic factors, indicating moves made by the US Federal Reserve will not determine Beijing’s interest-rate decisions.

“China’s monetary policy focuses on domestic priorities while considering internal and external balance,” Pan said at a briefing in Beijing on Monday (Sep 22) when asked about how the PBOC would now act in light of the Fed’s recent rate cut. “China’s central bank has made clear our macro-level principles of determining monetary policy.”

The PBOC has adopted a “data-based” approach that aligns with practices of its major counterparts from the Fed to the European Central Bank and the Bank of Japan, Pan said.

“Monetary policy adjustments are determined based on macroeconomic data,” he said. “We follow the same principle.”

The rare public remarks from Pan add clarity to how China’s central bank will handle a delicate balance of factors at home and overseas as it contends with a slowing domestic economy stuck in deflation and threatened by US tariffs.

Lower US interest rates potentially open up more room for the PBOC to ease its own policy without worrying about pressure on the yuan to depreciate. But despite flagging momentum in the economy, a massive stock rally in China remains a hurdle to looser policy because it could inflate a market bubble.

The Fed delivered its first rate cut of the year last week with a quarter-point reduction. New projections later showed policymakers are still split over the outlook.

The PBOC has been on pause since May, when it lowered its policy rate and the reserve requirement ratio (RRR) at the height of tensions with the US over trade.

As tensions still abound between the US and China over tariffs and with economic growth set to slow in the coming months, analysts polled by Bloomberg in late August forecast a 10-basis-point cut to the policy rate and a 50-basis-point reduction in the RRR, which determines the amount of cash lenders must set aside, in the fourth quarter.

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“Looking ahead, we will continue to apply a comprehensive mix of monetary policy tools in response to macroeconomic performance and evolving conditions,” Pan said.

The PBOC will use the methodology in the pursuit of goals such as ensuring “ample liquidity”, supporting a recovery in consumption and keeping the yuan’s exchange rate “broadly stable at an appropriate and balanced level”, he added.

After a strong start to the year, China’s economic growth has slowed in the second half despite record exports, with a slump in investment and the continued housing contraction compounded by deflationary pressure.

Fiscal spending increased at a slower rate in August for the second straight month while new loans missed forecasts, boosting calls for the government to step in and add stimulus.

The economy’s slower nominal growth, or expansion unadjusted for price changes, also implies that the earnings of companies and individuals are increasing at a weaker rate with deflation becoming widespread. As a result, the flow of credit is more sluggish.

Pan’s “emphasis on balancing financing stability with growth support reinforces our view that policymakers are in no rush to ease and may act later if underlying growth momentum deteriorates”, Goldman Sachs economists led by Andrew Tilton said in a report.

Goldman’s baseline forecast is for a 10 basis-point policy rate decrease and an RRR cut of 50 basis points in the fourth quarter, when the US bank expects year-on-year growth in China’s gross domestic product could decelerate towards 4 per cent.

“But with the full-year real GDP growth on track for this year’s around 5 per cent target, we think the risk is tilted towards no cuts,” Goldman’s economists said. BLOOMBERG