China unlikely to follow Federal Reserve rate hike as economy slows: survey

[BEIJING] China's central bank is expected to keep borrowing costs on hold through the end of this year despite further Federal Reserve rate hikes from this week, as economic growth slows and the trade war with the US gets worse.

The interest rate on People's Bank of China seven-day reverse-repurchase agreements will stay at the current level of 2.55 per cent through the end of the year, according to the median estimate in a Bloomberg survey of more than 40 traders and analysts conducted from Sept 18-20.

Fed policy makers are widely expected to authorise a quarter-point hike in their benchmark overnight interest rate in Washington on Wednesday and signal they are on track to complete another increase before the end of the year.

"There is no need to follow," said Meng Xiangjuan, chief bond analyst at SWS Research in Shanghai, adding that the stabilizing yuan-dollar exchange rate also reduces the pressure on the PBOC.

The escalating trade war with the US and slowing economic growth are weighing on monetary policy decisions. China's government is cutting some taxes, boosting spending, and loosening the monetary stance to ensure ample market liquidity.

"The trade uncertainty has prompted the central bank to maintain an accommodative bias," Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong, said in the survey, adding that the central bank will likely stay put as it did in June after the Fed raised rates.

'ACCOMMODATIVE BIAS'

Zhu Jianfang, chief economist at Citic Securities, also said in a research note that China is not likely to keep up with the Fed in the fourth quarter, citing the downward pressure on the real economy.

About 90 per cent of the survey respondents said the central bank will inject more liquidity into the market in the fourth quarter.

The medium-term lending facility tool is seen as being the most likely method for over 87 per cent of respondents, with injections via a lowering of the reserve requirement ratio or open market operations also seen as possible for over 70 per cent.

The PBOC will "try and maintain sufficient liquidity in the system", Jeremy Stevens, a Beijing-based economist at Standard Bank Group said in response to the survey. The measures won't translate into effective lending in the short term, but "that is better for the longer term outlook for the Chinese economy," he added.

LOOSER LIQUIDITY

China is likely to see looser liquidity toward the end of this month as the peak for tax payment and local government bond issuance has passed, while fiscal spending will increase, the PBOC-run newspaper Financial News reported Wednesday, citing unidentified analysts at Minsheng Bank.

Overall banking liquidity is at relatively high level, the central bank said on Wednesday, as fiscal spending is offsetting the impact of maturing reverse repo operations.

The bond market will resume a rally in the fourth quarter, according to a survey of 27 fixed-income traders and strategists polled Sept 18-20.

The government bond yield curve will move lower and flatter, according to 17 of the respondents

The median estimate was that yield on 10-year sovereign debt will end 2018 at 3.60 per cent, compared with 3.6754 per cent on Sept 25. Yield of 10-year China Development Bank bonds will be at 4.20 per cent

48 per cent of survey respondents expect fewer defaults in the last quarter of 2018, while 41 per cent expect more and 11 per cent see it being unchanged

Top-rated corporate bonds will be the most favored type of fixed-income product, chosen by 17 of 27 respondents in response to a question which allowed multiple answers

BLOOMBERG