China’s central bank has one less worry after the Fed’s rate cut, analysts say

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The U.S. Federal Reserve‘s interest rate cut takes some pressure off China‘s central bank, amid the multitude of challenges it already faces to keep the economy growing steadily.

The People’s Bank of China is unlikely to respond with major changes to its monetary policy, analysts said. Instead, the central bank can worry less about the key U.S. dollar-yuan exchange rate, amid drawn-out trade tensions between the two countries, a slowdown in economic growth and criticism China keeps its currency artificially weak to boost exports.

Rates overall are in a downward trend, Zhu Chaoping, a global market strategist at J.P. Morgan Asset Management said in Mandarin, according to a CNBC translation.

Among multiple policy measures, the People’s Bank of China can step back on foreign exchange policy and put more focus on other measures, such as increasing financing to small and medium-sized enterprises, Zhu said.

The Fed cut its benchmark interest rate on Wednesday New York time for the first time since 2008.

However, contrary to market expectations that the move was a signal that there will be further rate cuts ahead, Fed Chairman Jerome Powell called the decision a “midcycle adjustment to policy.”

Some investors interpreted the move as indicating tighter monetary policy than expected, and major U.S. stock indexes fell by more than 1% on Powell’s commentary. The rate-sensitive 2-year Treasury yield jumped to its highest since late May, while the 10-year Treasury yield fell, causing the so-called yield curve to flatten. The U.S. dollar index hit its highest in more than two years.

Matt Toms, chief investment officer of fixed income at Voya Investment Management, said the market moves were likely an overreaction.

“We would look to the Fed to come out and talk more about the lack of inflation,” he said. “That should help weaken the dollar, steepen the yield curve.”

The greater challenge is the (Chinese) central bank has many goals and needs many policies to achieve these goals. This is a lot more complex than the Fed.

Zhu Chaoping

JP Morgan Asset Management

On Thursday, the People’s Bank of China set the yuan’s midpoint slightly weaker against the greenback, at 6.8938. The currency has remained in a relatively narrow range this year, about half a percent weaker against the dollar for the year so far, according to Wind Information.

Ma Yan, researcher at Chinese brokerage Nanhua Futures, said it expects greater pressure on the yuan, but noted the economy is not doing so poorly as to warrant a significant devaluation.

In a Chinese statement translated by CNBC, Ma also said that if economic growth slows in the third or fourth quarter, a central bank cut to the reserve requirement ratio — or the amount that banks need to set aside as reserves — is a possibility. Some other loosening measures may also be possible.

More complex for China

However, analysts generally put less weight on such rate reductions than they do on other government measures aimed at stimulating the economy.

“If a cut is made across the board, then the worry is the money will flow to state-owned enterprises and property,” Zhu said. “So right now, the greater challenge is the central bank has many goals and needs many policies to achieve these goals. This is a lot more complex than the Fed.”

In contrast to the Fed’s policy emphasis on a single interest rate, China’s central bank uses a range of rates and measures to support economic growth in a complex, state-controlled environment. These tactics include efforts to boost loans to privately run businesses, rather than the state-owned enterprises that the large, government-owned banks have preferred to lend to.

This year, many analysts also expect fiscal policies — such as tax cuts and boosts to local government spending — to play a greater role than monetary policy.

Last month, central bank Governor Yi Gang told the privately run Chinese media outlet Caixin that China’s interest rates are at a proper level. He noted the country didn’t follow the Fed in hiking rates last year.

Yi also said in the report the central bank plans to replace its benchmark lending rates with ones based on the market, as part of an ongoing effort to combine two tracks of interest rates — but he did not disclose a time frame for its implementation.

— Correction: This article has been corrected to reflect that the yuan is about half a percent weaker against the U.S. dollar so far this year, according to Wind Information.

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