China’s central bank unexpectedly holds fire on rates as economy wobbles

SHANGHAI -On Thursday, June 14, 2018, China’s central bank, left borrowing costs for interbank loans unchanged which were a surprising decision that reflected the U.S. Federal Reserve’s policy rate increase and came as data showed the world’s second-biggest economy lost more steam than expected before.

The People’s Bank of China’s (PBOC) on-hold stance highlighted about the economic outlook as policymakers are trying to steer through the challenge of a trade spat with the United States and a government-led clampdown on debt.

U.S. President Donald Trump is about to meet with his top trade advisers on Thursday to decide whether to activate the threatened tariffs on billions of dollars in Chinese goods or not. Reverse repos are one of the command tools used to control liquidity in the financial system.

Analysts had expected the PBOC to follow the Fed to increase interest rates at a high pace – as it has tended to do – to keep the spread between Chinese and U.S. yields stable, reducing the risks of potential capital outflows that could pressure the yuan currency. Beijing, being into the third-year of a sweeping regulatory clampdown on riskier lending practices. Intensifying concerns over credit quality in China after a spate of corporate bond defaults over the past few months have also put the focus on financial stability.

Ken Cheung, the senior Asian FX strategist at Mizuho Bank in Hong Kong, said, “But now it seems the PBOC no longer needs to stabilize the currency”. He also added, “May economic data have shown weakness in the economy. I believe they would choose not to raise the interest rates now in order to keep the economic growth momentum.”

China reported a fall from the expected activity data for May, adding to views the economy is finally started to slow down under the weight of a prolonged crackdown on riskier lending that is only the reason for pushing up borrowing costs for companies and consumers.

by Sawan Kumar on June 14, 2018

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