People’s Bank of China: More Stimulus Ahead?

People’s Bank of China plays the role of guiding monetary policy for the Chinese economy with the aim of maintaining the stability of yuan and promoting growth. China has maintained an artificially low yuan against the dollar for several years.  The People’s Bank of China started a quantitative easing cycle in late 2014, since then the interest rate has been eased to current rate of 4.35 percent from 6 percent in 2014. It has also reduced the reserve requirements of the banks to 17 percent, according to recent market data released by

Since the beginning of easing cycle, the Chinese economy is unable to recuperate, signifying that the easing cycle has fueled speculative undertakings than actual investments. Amid all the uncertainty Moody’s have raised China’s GDP forecast to 6.6 percent from the previous forecast of 6.3 percent in 2016, citing “significant fiscal and monetary stimulus will spur growth in the economy”.

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China’ has kept their interest rate to record low since the start of 2016. Currently, the one-year lending rate is at 4.35 percent, and the last revision has happened on October 23rd, 2015. Policy makers have also lowered the reserve requirements for the banks, in order to inject the liquidity in the market.

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The Chinese economy has expanded at an annual rate of 6.7 percent in the quarter ending June 2016, same as the previous quarter, and little better than expectations. The already eased interest rate scenario is not adding up in returning the economy to previous highs of 10 percent GDP growth. This will restrain the Central Bank of China on raising rates.

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Inflation in China has risen to 1.8 percent, lower than the previous month and in line with the consensus. It is the lowest reading for 2016, as politically sensitive food prices have risen at a higher pace than non-food items.

With the backdrop of a slew of data about inflation, GDP and manufacturing PMI, it is clear that there is no room for Chinese central bank to raise the rates. The lowering rate is also ruled out as that may fuel overheating in the property and stock market. The data indicates that the long-term growth of Chinese economy would require further rounds of fiscal stimulus.