BEIJING — As the US Federal Reserve gears up for an expected rate cut next week, China’s central bank is likely to resist a near-term easing in policy as it grapples with a dilemma: how to shore up a weak economy without further fuelling a hot stock market.
Policymakers are under pressure to fend off a sharp slowdown in growth that could threaten jobs and social stability, while avoiding the mistakes of 2014-2015, when aggressive policy easing and retail investor mania ended in a market crash.
A Fed rate cut could give the People’s Bank of China room to ease policy without risking capital flight or yuan depreciation, but policy insiders and economists say the central bank may wait for clearer economic signals rather than immediately follow the US move.
Financial markets expect the Fed to lower rates by a quarter point at its September 16-17 meeting, with two more cuts likely by year-end. The benchmark rate has held steady at 4.25 percent-4.50 percent since December.
“The likelihood of a Fed rate cut will give more room for our monetary policy, but we may not necessarily follow,” a policy insider involved in internal discussions said, declining to be named due to the sensitivity of the matter.
“Any policy action will depend on the state of the (Chinese) economy. The stock market is very active right now – if we cut rates, wouldn’t that just be like adding fuel to the fire?”
Ting Lu, chief China economist at Nomura, expects the PBOC to avoid cutting rates immediately if the stock rally persists, to avoid fuelling a bubble, but said it may deliver a modest 10-basis-point rate cut over the coming weeks if the markets correct.
So far this year, the PBOC has cut its key policy rate – the seven-day reverse repo rate – by 10 basis points and reduced banks’ reserve requirement ratio by 50 basis points, with both moves announced in May as part of broader stimulus measures.
“While rolling out high-profile rate cuts could fan the flames and inflate a stock market bubble, doing nothing risks worsening the growth slowdown,” Lu said in a research note.
“Faced with this dilemma, Beijing needs to tread carefully over the next couple of months, and the PBOC might be reluctant to follow the Fed in cutting rates in September.”
HOT STOCKS VS COOLING ECONOMY
Analysts remain bullish on Chinese stocks, noting that the rally is led by institutional investors, with retailers just starting to join. Chinese households, wary of spending or investing, sit on a record 160 trillion yuan ($22.45 trillion) in savings.
The world’s second-largest economy has been hobbled by a prolonged slowdown, as advances in tech innovation and manufacturing have not fully offset declines in traditional industries, stoking increased employment pressures.
Recent data suggested the tide is unlikely to turn soon: July saw factory output growth at an eight-month low, retail sales slumping, and new yuan loans contracting for the first time in 20 years.
