China will loosen its monetary policy slightly over the next 12 months while maintaining a tight grip on the yuan as an anchor of stability, a Reuters poll shows. Conducted over the past week, the poll supports the view that initial signs of an early recovery in the worlds third-largest economy could make it unnecessary for authorities to act very aggressively to achieve their aim of around 8 percent growth.
Coupled with a tentative rebound in investment and output data, a surge in new yuan lending in the first few months of the year has prompted many economists to scale back the number of interest rate cuts they expect. The median forecast of 26 analysts based in China, Hong Kong and abroad is now for one 27 basis-point cut in the benchmark one-year yuan lending rate this quarter, to 5.04 percent, where it will basically mark time until the end of March 2010.
They anticipate a similar cut in the one-year deposit rate, to 1.98 percent, and for it to stay there until a year from now. "We still expect the Peoples Bank of China to cut its leading interest rate," said Flemming Nielsen with Danske Bank in Copenhagen. "However, risk to Chinese growth has become more balanced and we cannot rule out the possibility that we have seen the last interest rate cut in China."
The new forecasts contrast sharply with expectations from the poll conducted in January that the central bank would cut benchmark rates by a total of 108 basis points in 2009, leaving the lending rate at 4.23 percent at the end of this year.
Record lending figures since then have changed the picture dramatically: with money and credit growth surging, economists say the central bank feels less need to lower borrowing costs. Banks extended a record 1.62 trillion yuan ($237 billion) in domestic currency loans in January and another 1.07 trillion yuan in February, and domestic media reported this week that the figure for March jumped to 1.87 trillion yuan.
The forecast of only a modest cut in rates is consistent with Chinas relatively bright economic outlook. Economists polled by Reuters expect annual gross domestic product growth to slow to 6.3 percent in the first quarter from 6.8 percent in the fourth quarter of 2008, but expectations are hardening that the economy will enjoy a second-half recovery.
In the G7 countries, by contrast, recession is likely to drag on until at least late this year. Still, Chinese authorities may need to loosen liquidity throughout the next 12 months, analysts say, by steadily lowering banks required reserve ratio.
The median forecast is for the central bank to cut the ratio for big banks from 15.5 percent now to 15 percent by the end of this quarter and to 13.25 percent by the end of March 2010. "We will probably see monetary policy eased further in the second half, when the current surge in credit growth moderates," said Isaac Meng, an economist with BNP Paribas in Beijing.
Government and corporate bond issuance would drain some of the liquidity currently fuelling lending growth, as would a potential resumption of initial public offerings, prompting the need to loosen the taps somewhat, Meng said. One issue on which analysts are taking Beijing on its word is its repeated vow of a stable exchange rate.
The Reuters poll showed that the yuan, also known as the renminbi (RMB), will continue to be effectively pegged to the dollar for the next six months, remaining steady at 6.83 per dollar through September. It will then firm to 6.78 per dollar by the end of the first quarter of 2010, according to the median forecast of the poll.
That would mark a 12-month rise of 0.8 percent compared with an increase of 2.6 percent over the past 12 months. Meng with BNP Paribas said that, with exports falling sharply and the yuan at its most expensive level on a trade-weighted basis since 1995, there is little pressure for it to appreciate.
On the other hand, depreciation would not sit well with other countries and could prompt a protectionist backlash. "Also, a stable exchange rate is very important to provide a stable environment for monetary easing. So I think short-term, the peg is the most appropriate policy now," Meng said.
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