The decision of the Chinese central bank is today
All talk before Wednesday revolves around the Federal Reserve, but there’s a chance the PBOC could take a step as well. If so, it would be a much bigger market driver.
At 9:30 p.m. ET (1:30 a.m. GMT), officials will release the decision on the 1-year and 5-year prime lending rates, which are 3.85 percent and 4.65 percent, respectively.
These benchmark rates have remained unchanged for 16 months and there is a strong consensus that they will not be lowered this week.
Speculation cooled after comments by PBOC Vice Governor Pan Gongsheng and Monetary Policy Chief Sun Guogeng on September 8 said there was no significant shortage of base currency and that liquidity supply and demand would remain essentially balanced in the coming months. Gongsheng also said the central bank will maintain a prudent monetary policy.
A Reuters poll this week showed that 19 of 20 economists polled expected no change, with the only outlier predicting a 5 basis point cut in the LPR.
Speculation has also cooled after around $ 93 billion in MLF loans rolled over earlier this week at unchanged rates.
Yet the PBOC will undoubtedly have recognized the pressure that China’s woes are exerting on domestic and international markets. As they showed with a surprise RRR drop in July, they’re also not afraid to move when the market isn’t expecting it.
Recent data from China has been poor with retail sales up 2.5% year-on-year from 7.0% expected and 8.5% the month before. Industrial production has also been weak and the official non-manufacturing PMI is well in contractionary territory at 47.5.
Economists have repeatedly lowered growth estimates, with Nomura in August slashing third and fourth quarter estimates by a percentage point. As of today, Bank of America cut its annual forecast to 8.0% from 8.3% and cut 2022 to 5.3% from 6.2%. Goldman Sachs hinted at something even worse, saying that 5-6% growth would be difficult next year due to issues in the real estate market.
All of this is taking place against the backdrop of the looming bankruptcy and restructuring of Evergrande. China is probably trying to organize a soft landing in real estate, but by allowing the company – the country’s second-largest real estate company – to collapse, it risks a harder fall. At the same time, if they relax too much or too quickly, they could point to a PBOC put.
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