The People’s Bank of China will raise borrowing costs in the open market if the US Federal Reserve decides to increase rates this week, according to a Bloomberg survey.
A majority of 31 economists said the PBOC will increase by five basis points the rate it charges on reverse-repurchase agreements, which guide funding costs in financial markets, after the Fed’s expected tightening. That decision is due to be announced around 2:00 a.m. Beijing time on Thursday, with a potential PBOC step coming as early as that day.
Meanwhile, a similar share of economists said the PBOC will further lower reserve-requirement ratios in the second half of this year, the survey showed. Such a move would release liquidity into the financial system, helping lenders meet a string of repayment obligations in the coming months.
The prospect of the central bank tightening with one hand and loosening with the other shows the multiple targets that the PBOC is currently trying to reach: It wants to ensure enough funding to the real economy to manage a nascent slowdown, keep up the pressure on banks to curb leverage, and maintain a steady interest-rate differential with the US.
The central bank is facing a “trade-off” during deleveraging and it has to adjust policies constantly as the situation changes, said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It has to ease slightly when companies feel the squeeze, and raise borrowing costs again if the financial sector resumes adding leverage.” He said the overall policy is moving to “neutral and even to a slightly easing bias” from the previously tight stance.
Investors anticipate the Federal Reserve will increase its benchmark lending rate by a quarter-point to a range of 1.75 percent to 2.0 percent when it meets. Moving in step with the US prevents the yuan from weakening further against a strong dollar, and it keeps the spread between China’s 10-year government bonds and Treasuries in a comfortable range — fending off capital repatriation and supporting foreign investors’ demand for domestic Chinese bonds.
Not hiking would be a strong signal of an easing stance, according to Xia. Speculation abo-ut just such a stance grew rec- ently when authorities cut reser-ve ratios and adjusted the collateral rules for the central bank’s medium-term funding tool.