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Fed rate cut eases pressure on Chinese PBOC, analysts say

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

Giulia Marchi | Bloomberg | Getty Images

A much-anticipated interest rate cut by the US Federal Reserve would give China more leeway to bolster its slowing economy, some analysts said.

During the night, the markets took into account the comments of Fed Chairman Jerome Powell during the first of two days of testimony before the US Congress, saying that it was expected that monetary policy would be eased in the USA.

A looser monetary policy would reduce pressure on the Chinese central bank to relax its monetary policy. In the midst of trade tensions with the United States, the Chinese economy has struggled to gain momentum.

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

Among the many measures taken to support the economy over the last few months, the People's Bank of China (PBoC) has made a targeted effort to reduce the financing costs of private enterprises, which account for the majority of economic and social growth. of the country's employment.

"If the Fed is taking steps to reduce rates, which, in my opinion, is not a given … it simply means that the PBoC has some leeway to see if the policies implemented have an impact on the real economy, "Hannah Anderson, global market strategist at JP Morgan Asset Management, told CNBC on Thursday.

The central bank will also be under less pressure to allow the yuan to depreciate, which will help maintain the goal of maintaining a stable exchange rate, she said, while high Treasury prices would increase. the paper value of PBoC holdings, thereby strengthening confidence.

The US dollar index fell about 0.4% overnight, following Powell's comments. The People's Bank of China slightly strengthened the midpoint of the yuan against the greenback on Thursday at 6.8677.

Some analysts predict that if the Fed lowers its rates, it would go so far as to encourage the Chinese central bank to take similar measures.

"If the Fed cuts rates, it's likely the PBOC will follow suit," Leland Miller, chief executive officer of China Beige Book, said 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 reduction in benchmark interest rates is almost purely symbolic and will not affect most businesses," Miller said. He noted that "only a small subset of state-owned companies pay the benchmark rate and that most of these companies do not have to repay their loans anyway".

A Reuters poll released on Wednesday showed economists expect the People's Bank of China to maintain its key rate unchanged this year while reducing banks' reserve ratio twice in the second half of this year.

An easing of monetary policy would help support growth, but Beijing has also turned to fiscal tools such as tax cuts to revive the economy in the latest round of stimulus.

However, Larry Hu, chief economist for China at Macquarie, said that he did not expect the Chinese central bank to follow the Fed by lowering the key rate as economic data n & # 39; 39, do not indicate enough slowdown to justify a major policy change at the present time. .

"In the United States, it's important for the Fed to cut rates," Hu said in a note on Wednesday. "But in China, what really matters is boosting the infrastructure and the property."

Instead, it predicts that policymakers will wait until the fourth quarter to eventually lower the benchmark rate or take similar action. China's 1-year benchmark loan rate has remained unchanged since 2015, Hu said.

A Reuters poll showed that economic growth in China is expected to slow to a 29-year low of 6.2 percent this year due to uncertainties in the ongoing trade dispute with the United States.

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