Fitch Ratings agency has made a significant adjustment to its predictions regarding China’s policy rate changes. The agency now anticipates that China will maintain its one-year medium-term lending facility (MLF) at 2.5% for the remainder of the year, postponing any rate cut until next year. This new forecast diverges from their earlier projection of a single cut in 2024.
One of the primary reasons behind this decision lies in external factors, particularly the impact of the U.S. Federal Reserve’s interest rate policies on China. Concerns over the exchange rate between the Chinese yuan and the U.S. dollar, influenced by the Fed’s stance on interest rates, have constrained the actions of the People’s Bank of China (PBOC).
Jeremy Zook, Fitch Ratings’ head of sovereign rating in Asia Pacific, emphasized that the Fed’s maintenance of high interest rates has limited China’s flexibility in adjusting its own rates. However, with expectations of the Fed easing its monetary policy in the coming year, there may be greater maneuverability for the PBOC to make necessary changes.
In light of these constraints, it is anticipated that Beijing will focus more on utilizing fiscal policy as a tool for economic management in the current year. This shift in emphasis highlights the interconnectedness of global economic factors and the intricate balance that policymakers must navigate in response to changing conditions.
The decision to delay a policy rate cut is also influenced by concerns surrounding bank net interest margins (NIM). As Zook pointed out, low NIM poses challenges for the PBOC, impacting bank profitability and overall economic stability. This indicates a need for a holistic approach to monetary and fiscal policy adjustment in response to evolving circumstances.
The last reduction in China’s one-year MLF occurred in August 2023, according to official data sources. The MLF, set monthly by the People’s Bank of China, serves as a guiding factor for the benchmark loan prime rate (LPR) utilized by financial institutions. The timing and frequency of these adjustments reflect the ongoing dynamics and challenges within the Chinese financial system.
PBOC Governor Pan Gongsheng reaffirmed the commitment to a “supportive” monetary policy stance, emphasizing stability amidst complex economic conditions. The exchange rate of the yuan against other major currencies and the interest rate differentials between China and the U.S. are essential considerations for policymakers as they navigate the current economic landscape.
Fitch Ratings’ revised expectations regarding China’s policy rate adjustments underscore the complex interplay of domestic and international factors shaping economic decision-making. As China seeks to maintain stability and address challenges such as low NIM and capital outflows, a strategic and multifaceted approach to monetary and fiscal policy will be essential in navigating the evolving economic environment. By closely monitoring market dynamics and leveraging various policy tools, Chinese authorities can adapt and respond effectively to changing conditions, supporting sustained economic growth and stability.