Zhou Xiaochuan is breaking stride with Janet Yellen.
The People’s Bank of China (PBOC) Governor refrained from following the Federal Reserve in raising borrowing costs, a switch from March when the central bank increased money-market costs hours after its US counterpart tightened.
The shift suggests Zhou sees more autonomy to address domestic challenges, with the yuan holding stable and tighter capital controls keeping outflows at bay. More independence allows China’s policy makers to shrug off Fed tightening for now, as there are already signs growth will slow in coming quarters amid curbs aimed at cooling the property market.
The PBOC charting its own course “protects China from being exposed to uncontrollable risks” said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. “The central government would like to press ahead with deleveraging, and it wants to ensure the process is smooth and stable. Capital control measures have allowed them to do so.”
Another factor easing pressure on Zhou: The yield gap between US and Chinese 10-year sovereign bonds widened to a two-year high of 150 basis points on June 6, compared with less than 90 on March 15. That means there’s less appeal for moving money to the US, easing the pressure on outflows.
The PBOC in March raised rates it charges in open-market operations and on its Medium-term Lending Facility, in step with the Fed’s quarter percentage-point move. Those rates remained unchanged after policy makers in Washington raised the benchmark rate.
The PBOC raised rates in March because it wanted to curb financial leverage, and now it doesn’t have that intention as previous measures have already proven quite effective, said Ming Ming, a former central bank monetary policy official who’s now head of fixed-income research at Citic Securities Co. in Beijing.
To be sure, China hasn’t closed the door on raising borrowing costs and may still choose to do so. After the Fed raised rates in December, the PBOC didn’t follow suit until February.
Economic data showed that retail sales and factory output remained resilient in May, despite signs that measures to cool the property market are having some effect. Authorities also are pushing to reduce financial system leverage, which was reflected in new credit creation slowing as the broad M2 money supply rose at the slowest pace on record.
That’s happening against a backdrop of continued signs of strength in the U.S. job market, where fewer Americans are filing for unemployment benefits. Fed policy makers this week also issued forecasts showing another three quarter-point rate increases in 2018, similar to the previous projections in March. But that may matter less than it did a few months ago.
“Fed decisions are becoming less influential to China’s monetary policy now than at the beginning of the year,” said David Qu, an economist at Australia & New Zealand Banking Group Ltd. in Shanghai. “That allows policy makers to focus more on challenges at home.”