Economists are forecasting that the People’s Bank of China is more likely to raise interest rates than cut them in the coming year, even as they slash growth projections for the world’s second-largest economy.
Eight of 15 analysts surveyed by Bloomberg News this month project an increase in the benchmark deposit rate by the end of June 2014, compared with two who see a reduction. The survey showed economists cut their forecast for the 10-year bond yield by 30 basis points in the past month to 3.5 percent, while keeping their two-year yield forecast at 3.08 percent, based on median estimates.
The government “seems to have become more tolerant” of weaker growth, UBS AG says, as Premier Li Keqiang grapples with credit expansion and price gains seen approaching the official target. The gap between two- and 10-year yields has narrowed to an 18-month low of 38 basis points, suggesting the market is anticipating a slowdown without stimulus. The similar gap in India, which is expanding at its slowest pace in a decade, is 11 basis points.
“As long as growth is within the range of 7 to 7.5 percent, there’s no need to stimulate growth with interest-rate cuts,” said Li Wei, a Shanghai-based economist at Standard Chartered Plc, which is forecasting a deposit-rate increase to 3.75 percent through the second quarter of 2014 from the current 3 percent. “Concerns still exist on local-government debt risks and property-price rebounds.”
Standard Chartered this month lowered its growth forecast to 7.7 percent for 2013 from 8.3 percent.
Other respondents forecasting an interest-rate increase include JPMorgan Chase & Co., Daiwa Capital Markets, BNP Paribas SA and Banco Bilbao Vizcaya Argentaria SA. Analysts at Mizuho Securities Asia Ltd. and Norddeutsche Landesbank Girozentrale projected a reduction.
Economists made their biggest cuts to growth projections since September, trimming the 2013 and 2014 outlooks each by 0.2 percentage point to 7.8 percent, based on median estimates. The monthly Bloomberg News survey was conducted from May 16 to May 21. The economy expanded 7.8 percent in 2012, the slowest pace in 13 years.
The reductions follow an unexpected deceleration in first-quarter growth to 7.7 percent and April data on investment and factory output that missed forecasts. A preliminary Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics showed a drop this month to 49.6, less than the final 50.4 for April and the 50.4 median estimate in a Bloomberg News survey. It signals the first contraction in seven months.
The yield on 10-year government bonds has dropped one basis point, or 0.01 percentage point, to 3.42 percent in the past month, according to the National Interbank Funding Center. The rate on two-year debt climbed four basis points to 3.03 percent.
The weaker growth outlook is having little effect on projections for inflation. While the median estimate fell for consumer-price index gains in the second and third quarters, it was unchanged at 3.4 percent in the fourth period, at 3 percent for 2013 and 3.5 percent for next year. The government in March set an inflation target of 3.5 percent for 2013, down from 4 percent last year, and a growth goal of 7.5 percent, the same as in 2012.
“Inflation will become a big concern for the Chinese government” later this year as pork prices rebound, said Sun Chi, Hong Kong-based economist at Daiwa. The central bank may increase benchmark lending rates twice by 0.25 percentage point in the fourth quarter if China’s CPI rises more than 4 percent, she said. “There are no grounds for the PBOC to cut interest rates for growth purposes.”
At the same time, such a move can’t be ruled out, Sun said. China surprised economists last year by cutting benchmark interest rates in June and July to counter a slowdown. The PBOC also lowered the reserve-requirement ratio for banks three times from November 2011 to May 2012.
Property-price gains defying government efforts to cool the market may help keep policy makers reluctant to add any more monetary stimulus. China’s new home prices rose in April from a year earlier in 68 of the 70 cities the government tracks, according to the National Bureau of Statistics.
“The government’s patience with housing-price gains is running out, and a hike in benchmark interest rates is an obvious policy choice,” said Dong Xian’an, chief economist at Peking First Advisory Co. in Beijing, an investment consultant. “It doesn’t make sense to cut interest rates when growth is still above the target.”
Dong expects the PBOC to increase the benchmark deposit rate to 3.5 percent by the end of 2013 and the one-year lending rate to 6.25 percent.
The cost of insuring China’s sovereign debt is climbing as the economic outlook deteriorates. The prices of credit-default swaps protecting the notes for five years against non-payment has averaged 72 basis points this quarter, up from 65 in the previous three months, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Mizuho’s Shen Jianguang said China has “clear” reasons to cut interest rates, including high corporate borrowing costs and the need to reduce pressures from hot-money inflows. Weak growth and subdued inflation will add to forces spurring the central bank to help the economy, said Shen, chief Asia economist in Hong Kong.
“The PBOC should cut interest rates and it will cut interest rates,” said Shen, who forecasts 0.25 percentage point reductions in the lending and deposit rates in the fourth quarter.
The yuan fell 0.07 percent to 6.1353 per dollar in Shanghai at 10:17 a.m., paring its annual advance to 1.6 percent. The economy will enter a consolidation period that will last for two years, and currency appreciation pressure is one of the challenges that China faces, former central bank adviser Li Daokui told reporters in Hong Kong May 21.
Most analysts don’t foresee any interest-rate changes this year, with five of 21 respondents forecasting a deposit-rate increase and two seeing a cut by the end of December.
“The government has made it very clear that it has no intention to stimulate growth,” said Standard Chartered’s Li. While China’s central bank surprised markets by cutting interest rates last year, “the new government will not follow suit.”
--Zhou Xin. With assistance from Cynthia Li in Hong Kong. Editors: Scott Lanman, Sandy Hendry
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