People’s Bank has power to calm rout
CHINA’S central bank, which helped trigger a market rout with a surprise devaluation two weeks ago, may be the only one around the world with the firepower to arrest it.
With about 25 trillion yuan (R50 trillion) of bank deposits still locked up as reserves and the benchmark one-year interest rate at 4.85 percent, the People’s Bank of China has an ample monetary policy arsenal at its disposal. Lending rates in the US, Europe and Japan already are close to zero and the rout is shaking confidence that the global economy will be strong enough to withstand an expected policy tightening by the Federal Reserve.
The devaluation of the yuan on August 11 deepened concerns over a malaise in the world’s second-biggest economy and spurred a sell-off in global markets. China’s central bank yesterday added the most funds to the financial system in open-market operations in six months, Asian stocks rose with US index futures, while Chinese stocks extended losses.
“I would not rule out the possibility that China rolls out some strong stimulus plans particularly through fiscal policy,” said Zhao Yang, the chief China economist at Nomura Holdings in Hong Kong.
“It is unlikely to reverse the downward trend of economic growth, but may offset somewhat the headwinds.”
Little room
As an example of how little room central banks have to fight fresh crises, benchmark rates in developed economies average just 0.22 percent, according to JPMorgan Chase. That’s 316 basis points lower than the average from 2005 to 2007. Most have also swollen their balance sheets to unprecedented levels with asset purchases.
Still, China’s woes could shape the decision-making of other central banks by weakening the global economic outlook and transmitting another bout of deflationary pressures around the globe. Economists are debating whether the Fed will delay raising interest rates or if the European Central Bank will bolster its quantitative easing programme.
The debate about what central bankers can and should do is underway just as many of them prepare to travel to Jackson Hole, Wyoming, for the Federal Reserve Bank of Kansas City’s annual monetary policy conference.
‘More dovishness’
“We do wonder if there will be a sense of much more dovishness coming out of there,” said David Owen, the chief European financial economist at Jefferies International. “Central bankers will have to be thinking about what to do.”
Reserve Bank of India governor Raghuram Rajan called on policymakers to avoid giving “booster shots” to stock markets.
“It is not the role of the central bank to elevate sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits,” he told a conference in Mumbai on Monday. In China, the case for policy easing is rising; a manufacturing gauge fell to the lowest in more than six years this month, following weaker-thanexpected data on investment, industrial output, retail sales and exports in July.
Policymakers’ efforts to underpin growth have yet to avert the slowdown, threatening Premier Li Keqiang’s expansion target of about 7 percent for this year.
Measures have included four interest rate cuts since mid-November, a debt swap programme to ease financing pressure on local governments and funds injected into policy banks to channel credit to the economy.
A “circuit-breaker” easing needed to come from China to end negative feedback coursing through currency and share markets, said Shane Oliver, the head of investment strategy at fund manager AMP Capital Investors in Sydney.
He expects China to cut the benchmark lending rate to 4 percent from 4.85 percent by year-end.