December 7, 2018 / 3:40 AM / 8 days ago

Breakingviews-Trade truce gives China room to loosen up

Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - A trade truce gives China room to loosen up. Beijing has left its benchmark interest rate untouched since 2015. But officials at the People’s Bank of China, eager to foster growth, have other monetary policy levers they can pull, like interbank rates or the amount lenders must hold in reserve. A period of diplomatic calm gives them the space to do just that.

For most central bankers, the go-to weapon is the benchmark cost of borrowing. Not so in the People’s Republic, where the main lending rate has stayed flat at 4.35 percent for more than three years, despite plenty of economic ups and downs. In part, that’s because the cabinet - rather than the central bank - makes the call on that number, forcing technocrats to look elsewhere.

So far, they have been cautious. Too much easing could lead the market to anticipate an even broader stimulus, causing the currency to crash and possibly even generating uncomfortable capital outflows.

Now, though, they have been given some space to manoeuvre. The agreement hashed out between the U.S. and China at the G20 meeting, postponing a planned U.S. tariff hike on $200 billion of Chinese goods, caused the onshore yuan to strengthen from about 6.96 to the dollar on Nov. 30 to nearer 6.88 on Thursday. The offshore yuan earlier this week touched its highest level since around mid-September.

That may not seem like much, but it moves the currency away from an important psychological threshold: 7 yuan to the dollar, last seen in 2008. Officials are extremely reluctant to cross it. As recently as last week, it seemed that even a bit more easing might cause the yuan to either blow past that marker, or the PBOC would be forced to burn reserves to slow the currency’s descent.

One step may be to trim rates for the medium-term lending facility, which encourages bank lending: 286 billion yuan of that is due to expire next week. They might also bring forward a fifth expected cut so far this year to the amount of cash banks need to hold at the PBOC. Any of these would hurt the currency. But with the trade ceasefire delivering some protection there, policymakers can relax.

Breakingviews

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