(Bloomberg) -- China watchers are keeping their eyes peeled this week for clues on the central bank’s next move.
The focus is on Federal Reserve Chairman Jerome Powell’s scheduled testimony to Congress from July 10, and the signals he may give about the onset of a fresh U.S. easing cycle that will set the monetary tone for China and other emerging markets. Wednesday morning Beijing time, investors will also have new inflation data, with economists forecasting a slowdown in producer price growth to just 0.2 percent.
The re-emergence of the deflation specter amps up pressure for the People’s Bank of China to ease policy, according to David Qu at Bloomberg Economics. Coupled with a more dovish Fed, expectations are mounting that the PBOC will see both the need and the opportunity to take further steps to prop up growth at home.
The PBOC will “move toward easing” as growth slows and inflation pressure remains muted, said Ding Shuang, chief China and North Asia economist at Standard Chartered (LON:STAN) Bank Ltd. in Hong Kong. He said the central bank could cut borrowing costs for open market operations as soon as after the release of economic data for the second quarter, if the reading isn’t good.
Gross domestic product, industrial output and other data due on July 15 are also forecast to show Chinese economic growth decelerated in the second quarter.
Given concerns over domestic asset price bubbles and the fragile yuan, China is unlikely to embark on an aggressive cycle of cuts to the benchmark one-year lending rate. Economists have dialed up expectations that the PBOC will reduce the amount of cash banks have to deposit with the central bank, according to a recent survey by Bloomberg. Borrowing costs of the PBOC’s daily open market operations are also seen declining.
The PBOC may first focus on boosting lending to the private sector, according to economists at HSBC Holdings (LON:HSBA) PLC. Should more tariffs be imposed as trade tensions with the U.S. deteriorate or economic data worsen, the central bank might then pair a rate cut with a revamp of the interest rates system, chief China economist Qu Hongbin said.
The PBOC has kept the financial system flush with liquidity as a takeover of a regional bank spooked investors and tightened funding for small lenders. Yet cheaper borrowing costs in money markets haven’t led to obvious declines in company funding costs. That’s giving rise to more urgent discussions about reforming the interest rates system to make it more market-oriented.
