The People’s Bank of China headquarters (right) in Beijing. The PBoC’s two benchmark interest-rate reductions and one lowering of banks’ reserve ratio in four months failed to bring borrowing costs down, as the world’s second-largest economy faces capital outflows that drain cash.


Bloomberg/Hong Kong


The cost of borrowing in China’s interbank market is the most expensive on record for the start of a year. That suggests the central bank isn’t finished easing policy.
The seven-day repurchase rate was 4.41% on average in the year to March 13, up from 4.19% a year earlier and the highest for the period since the fixing began in 2004. Australia & New Zealand Banking Group and AXA Investment Managers see a reserve-requirement ratio cut this month, while Barclays. predicts one “in the coming weeks.”
Two benchmark interest-rate reductions and one lowering of banks’ reserve ratio in four months failed to bring borrowing costs down, as the world’s second-largest economy faces capital outflows that drain cash.
Data on factory output and retail sales released in the past week trailed estimates, fueling bets authorities will loosen policy to secure a 7% economic growth goal that is already the slowest in more than 15 years.
“I’m in the camp expecting a reserve-requirement cut,” Rajeev De Mello, who manages about $10bn as head of Asian fixed income at Schroder Investment Management in Singapore, said in a March 12 interview. “Interbank rates are not showing any signs of coming down. That worries me a bit because that shows liquidity in China is still very tight.”
Schroder has been increasing its holdings of China’s onshore five- and 10-year sovereign bonds because it expects yields to trend lower as the economy slows, De Mello said. The asset manager estimates a 50 basis-point cut in the RRR.
The yield on government notes due 2020 fell 23 basis points this year to 3.283%, according to Chinabond data. The one-year interest-rate swap, the fixed cost to receive the floating repo rate, climbed 19 basis points in 2015 and touched a six-month high of 3.7% on March 9.
Industrial production rose 6.8% in the January- February period from a year earlier, compared with the 7.7% median estimate in a Bloomberg survey, official reports showed March 11. Retail sales increased 10.7%, shy of the 11.6% forecast.
“What these data represent is that the economy is slowing,” Mirza Baig, Singapore-based head of foreign exchange and interest-rate strategy at BNP Paribas, said in a March 12 phone interview. “Overall financial conditions are tight for the economy and bode well for more easing. We are expecting a reserve-ratio cut so that money-market rates can normalise.”
Not all of China’s economic indicators were bad. Exports grew more than 48% in February, distorted by the Lunar New Year holidays.
That beat an estimate of 14%. Aggregate financing, the broadest measure of new credit, was a forecast-beating 1.35tn yuan ($215.7bn). M2 money supply rose 12.5% from a year earlier, compared with the forecast of 11%.
The nation’s money supply growth is appropriate and a new normal of slower economic expansion doesn’t mean there’ll be a switch from a prudent policy stance, PBoC Governor Zhou Xiaochuan said in Beijing on March 12.
“I’m not that pessimistic about China’s economy because the problems can be fixed and the policy makers are fixing them,” Larry Hu, head of China economics at Macquarie Securities in Hong Kong, said by phone on March 12. “Lowering the reserve ratio won’t necessarily have an immediate impact on borrowing costs, but it’s a move to meet China’s structural change, which is declining capital inflows.”
There will be at least 20 reserve-ratio cuts in the next five years, Hu said, adding that the first could happen as soon as this month. The nation’s RRR is among the world’s highest at 19.5%.
Yuan depreciation risks that are spurring capital outflows are complicating efforts to bring down borrowing costs. The Chinese currency has dropped 0.9% against the greenback this year to 6.2595 a dollar. BNP Paribas sees the yuan weakening to 6.4 by the end of December, Baig said.
Yuan positions for foreign-exchange purchases at Chinese financial institutions, a gauge of capital flows, fell 108.3bn yuan to 29.3tn yuan in January, the lowest in a year. That followed a drop of 118.4bn yuan in December, signaling the biggest outflow since 2007.
Tight monetary conditions will continue to drag on China’s growth and heighten the risk of deflation, according to ANZ economists Liu Li-Gang and Zhou Hao. Producer prices contracted in February, extending a record run of declines to 36 months. Although inflation climbed 1.4%, it was below the government’s target of 3%.
“Export growth will not be enough to offset domestic weakness and prevent a further deceleration of growth,” Aidan Yao, a Hong Kong-based senior economist at AXA Investment, which managed $660bn of assets globally as of end-December, said by e-mail on March 12. “Without lowering interbank rates, banks will unlikely pass on the latest rate cut to borrowers. We think the next move for the PBoC is to cut the reserve ratio, possibly before the end of this month.”