China Retains Borrowing Cost; Industrial Output Growth Eases

Cornelia Mascio
Giugno 18, 2018

Industrial output rose 6.8% in May from a year earlier, versus a projected 7 percent, while retail sales expanded 8.5 percent, versus a forecast 9.6 percent.

Chinese equities were boosted by the news that the PBOC wouldn't raise rates, before dropping after the economic data was released. The Shanghai Composite Index erased a loss of 0.5 percent to rise 0.3 percent, while the ChiNext gauge of small caps and tech stocks led gains, climbing 0.9 percent.

The central bank will use monetary policy tools including reserve requirements and relending to support those companies, which contribute to about 80 per cent of China's employment and 60 per cent of economic output, Mr Yi said.

China's economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, with data on Thursday pointing to a broad slowdown in activity in May. It boosted injections via the Medium-term Lending Facility last week to the most in more than a year to support smaller firms, while in April it cut the RRR by 1 percentage point, citing a similar goal.

The data, which showed the slowest investment growth in over 22 years, "was all shockingly weak by Chinese standards", economists at Rabobank said, adding that the readings may explain the central bank's decision to keep rates on hold.

"It's possible that the PBOC will follow in due course", writes Mr Tom Orlik, chief economist at Bloomberg Economics. "The decision not to do so today looks like an indication that the PBOC is more focused on supporting growth and alleviating financial stress as markets fear an increase in corporate defaults".

Analysts forecasting an economic cool-down are largely basing their assumptions on slowing local government spending and real estate investment in response to regulators' campaign to reduce financial risks and curb a rapid build-up in debt. While that's a deliberate policy, officials risk a worse-than-desired deceleration in growth.

Economists surveyed by Bloomberg see a 6.5 percent expansion this year after 6.9 percent in 2017, in line with the government's own target.

China has promised to retaliate if the US pushes ahead with plans to levy tariffs on $50 billion in imports, threatening an escalating, tit-for-tat trade war.

"May economic data have showed weakness in the economy".

China's broadest measure of new credit slumped in May to the lowest in nearly two years, as a campaign to rein in the shadow banking sector gained traction.

Policy makers are also balancing those moves by taking the brakes off some liquidity controls.

Analysts had expected the PBOC to follow the Fed to increase interest rates modestly - as it has tended to do - to keep the spread between Chinese and U.S. yields stable, reducing the risks of potential capital outflows that could pressure the yuan currency.

"The liquidity strains are already having an impact on the economy", he said. "To stabilize growth, the PBOC will show greater policy flexibility". "This, along with the ongoing trade tension, will add pressure on the yuan exchange rate in the second half".

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