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Home»Business»Morning Bid: China to cut rates, but will it ‘go big’?
Business

Morning Bid: China to cut rates, but will it ‘go big’?

August 21, 2023No Comments3 Mins Read
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The headquarters of the People's Bank of China, the central bank, is pictured behind an iron chain in Beijing

The headquarters of the People’s Bank of China, the central bank, is pictured behind an iron chain in Beijing August 30, 2010. REUTERS/Jason Lee/File Photo Acquire Licensing Rights

Aug 21 (Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

The People’s Bank of China is expected to cut interest rates on Monday, but it may have to throw caution to the wind and ‘go big’ if it is to soothe the nervousness and concern around China currently sweeping through financial markets.

The Chinese central bank’s policy decision is one of three in Asia for investors to take in this week, with the Bank of Korea and Bank Indonesia both expected to keep interest rates on hold on Thursday.

The PBOC’s decision and wider developments around China’s markets and economy will dominate investors’ thinking this week along with the U.S. Federal Reserve’s annual Jackson Hole Symposium, where Fed Chair Jerome Powell will speak on Friday.

Investors will also be tuned into the summit of the BRICS group of major emerging economies – Brazil, Russia, India, China and South Africa – in South Africa this week, where Chinese President Xi Jinping will attend.

But whatever Xi says will likely be more political in nature. The assurances investors want from Chinese officials probably center more on monetary and fiscal policy.

Economists at Goldman Sachs and Barclays are among the many who expect the PBOC to lower its one-year loan prime rate by 15 basis points to 3.40%, which would be a new low.

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Despite Chinese policymakers’ conservative nature, the skew is surely for a bigger move on Monday, and further cuts and wider easing in the months ahead. The risk here would be to the currency, which is already extremely weak and vulnerable.

Economists are slashing their Chinese GDP growth forecasts and many doubt Beijing will meet its 2023 goal of 5.0%. Deflation, slumping trade activity and an imploding property sector are the familiar and increasingly serious risks.

Not only is the real estate crisis a threat to growth in its own right – the sector is a huge part of the economy – but the scale of indebtedness raises questions over the strength and stability of the $3 trillion shadow banking system.

Beijing is taking steps to bolster confidence, but so far these measures seem no more than tinkering around the edges. Chinese blue chip stocks are down 6% in the last two weeks, and financial conditions are the tightest since early December, according to Goldman.

China’s problems coincide with a deteriorating global backdrop. The dollar is surging, U.S. Treasury yields are breaking to new multi-year highs, and stock markets around the world are finally getting vertigo.

Much of that is perhaps being exaggerated by the seasonally thin market conditions of August. Either way, investors will be looking to Beijing and Jackson Hole this week for some degree of assurance and guidance.

Here are key developments that could provide more direction to markets on Monday:

– China interest rate decision

– Thailand GDP (Q2)

– Hong Kong inflation (July)

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By Jamie McGeever; Editing by Diane Craft

: .

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Acquire Licensing Rights, opens new tab

Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the U.S. again. Focus on economics, central banks, policymakers, and global markets – especially FX and fixed income. Follow me on Twitter: @ReutersJamie

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