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Fed rate cut will ease the pressure on China's PBOC, analysts say

Pedestrians walk past the People's Bank of China headquarters in Beijing, China, Monday, January 7, 2019.

Giulia Marchi | Bloomberg | Getty Images

A widely anticipated rate cut by the US federal reserve will give China more breathing space to increase its slower economy, some analysts said.

Accommodation, markets took Fed Mayor Jerome Powell's comments during the first of a two-day congressional testimony confirming the expectations of a simpler monetary policy in the United States. The S & P 500 peaked for 3,000 for the first time, and the Treasury is lower.

A looser monetary environment would reduce pressure on China's central bank to ease monetary policy. In the midst of trade tensions with the United States, China's economy has struggled to gain momentum.

Private surveys released last week by Caixin showed that service activity fell in June to its lowest since February, and the manufacturing sector contracted after three months of expansion.

Among the several measures to support the economy over the past few months, People's Bank of China (PBoC) has made targeted efforts to reduce financing costs to privately run businesses, which account for the bulk of its economic growth and employment.

"If the Fed continues and reduces prices, which I don't think is a given … it just means that PBoC has a little breathing space to see if the policies it has implemented have an impact on the real economy" Hannah Anderson, global market strategist by JP Morgan Asset Management, CNBC told on Thursday by phone.

The central bank will also face less pressure to let the yuan write off, making it easier to maintain a target of keeping the exchange rate stable, she said, while higher government bonds would increase the paper value of PBoC's holdings, which increased confidence.

The US dollar index fell by 0.4% overnight among Powell's comments. The People's Bank of China set the centerpiece of the yuan slightly stronger against the dollar on Thursday, 6,8677.

Some analysts expect the Fed to cut rates, so far as to ask China's central bank to take similar measures.

"If (does that when) the Fed reduces rates then it is quite likely that the PBOC will follow," said Leland Miller, general manager of China Beige Book, in an email. The company publishes a quarterly review of the Chinese economy based on a survey of more than 3,300 Chinese companies.

"But a reference interest rate cut is almost purely a symbolic feature that won't affect most companies," Miller said. He noted that "only a small subset of (state-owned companies) pays the reference price, and most of these companies don't have to repay their loans anyway."

A Reuters Opinion released Wednesday showed that economists predict people's Bank of China will keep the reference rate unchanged this year, while banks' reserve requirements increase twice in the second half of this year.

While easing monetary policy will help support growth, Beijing has also turned to tax tools such as tax credits to boost the economy in the last stimulus round.

But Larry Hu, economics in China at Macquarie, said he did not expect the Chinese central bank to follow the Fed in cutting the reference price, as economic data does not do It does not mean enough of a slowdown to justify a major political change exactly now.

"In the United States, it is important for the Fed to cut interest rates (r)," Hu said in a note Wednesday. "But in China, infra (structure) and property stimulate … what really matters."

Instead, he expects decision makers to wait until the fourth quarter to possibly cut the reference rate, or take some similar action. China's benchmark 1[ads1]-year lending rate has remained the same since 2015, Hu noted.

Reuters survey showed that China's economic growth is expected to slow to a 29-year low of 6.2% this year, including uncertainty from the ongoing US trade conflict

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