China’s central bank will refrain from choking the supply of cash in the third quarter to lower financing costs and help an economy forecast to expand at the slowest pace in 24 years, according to a Bloomberg survey.
Eighteen out of 21 traders and analysts polled July 7-9 expect the People’s Bank of China to use open-market operations to add money to the banking system, cutting the impact of slowing capital inflows. The seven-day repurchase rate, a gauge of interbank funding availability, will average 3.5 percent in the July-September period, down from today’s 3.74 percent. The yield on 10-year sovereign debt will be 4.15 percent on Sept. 30, compared with 4.13 percent yesterday, the survey showed.
PBOC Governor Zhou Xiaochuan has cut reserve-requirement ratios for some banks and injected funds to help achieve Premier Li Keqiang’s 7.5 percent growth target for the year. China’s manufacturing Purchasing Managers’ Index (CPMINDX) rose to 2014’s highest level in June while factory-gate prices fell at the slowest pace in two years. Chinese financial institutions’ foreign-exchange positions, a barometer of capital flows, gained 38.7 billion yuan ($6.2 billion) in May, the least since August.
“There are signs of stabilizing growth, but the recovery looks fragile,” Becky Liu, Hong Kong-based Greater China rates strategist at Standard Chartered Plc, said yesterday. “The increase of the yuan foreign-exchange positions will be quite small in the third quarter on a historical basis. Support from the central bank is necessary.”
The increase in yuan positions at Chinese financial institutions accumulated from foreign-exchange purchases will amount to 200 billion yuan in the third quarter from 755 billion yuan in the three months through March, according to the median estimate in the survey.
“This slow growth will become the new normal,” said Xie Yaxuan, an economist at China Merchants Securities Co. in Shenzhen. “The PBOC is now facing the problem of how to supplement money supply.”
The monetary authority has been adding cash to the banking system by keeping the amount of repo sales below that of maturing contracts. The PBOC injected a net 50 billion yuan this week, bringing the total additions in the past nine weeks to 493 billion yuan.
“As repo sales recently were very limited, maturing contracts going into August may not be enough to ensure interbank liquidity,” said Liu. “The PBOC is likely to resume reverse repos.”
China’s consumer prices gained 2.3 percent in June, down from May’s 2.5 percent, according to data from the National Bureau of Statistics released yesterday. The economy will probably grow 7.4 percent this year, the slowest since 1990, according to the median estimate in a separate Bloomberg survey.
The foundation of the nation’s recovery isn’t solid and it’s still too early to say the downturn has ended, Caixin magazine reported on June 29, citing Zhang Jianhua, the head of the PBOC’s Hangzhou branch.
“Economic growth has only stabilized, and is far from a full recovery,” said Chen Long, an analyst at Bank of Dongguan Co. in Guangdong province. “As inflation is expected to be low, the PBOC has ample room for stimulus, or to mitigate any impact from the drop of yuan foreign-exchange positions and financial risks.”
To contact Bloomberg News staff for this story: Helen Sun in Shanghai at firstname.lastname@example.org