China’s central bank unexpectedly holds fire on rates as economy wobbles

There are views the Chinese economy is finally starting to slow under the weight of a prolonged crackdown on riskier lending that is pushing up borrowing costs for companies and consumers. (Reuters)
Updated 14 June 2018
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China’s central bank unexpectedly holds fire on rates as economy wobbles

  • The rate for seven-day reverse repurchase agreements remained at 2.55 percent, the 14-day tenor at 2.70 percent and the 28-day tenor at 2.85 percent
  • Beijing is into the third-year of a sweeping regulatory clampdown on riskier lending practices

SHANGHAI: China’s central bank left borrowing costs for interbank loans unchanged on Thursday, a surprising decision that shrugged off the US Federal Reserve’s policy rate increase and came as data showed the world’s second-biggest economy lost more steam than expected.
The People’s Bank of China’s (PBOC) on-hold stance highlighted uncertainty about the economic outlook as policy makers try to steer through the challenge of a trade spat with the United States and a government-led clampdown on debt.
US President Donald Trump is set to meet with his top trade advisers on Thursday to decide whether to activate threatened tariffs on billions of dollars in Chinese goods.
The rate for seven-day reverse repurchase agreements remained at 2.55 percent, the 14-day tenor at 2.70 percent and the 28-day tenor at 2.85 percent, the PBOC said in a statement on its website.
Reverse repos are one of its most commonly used tools to control liquidity in the financial system.
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 US yields stable, reducing the risks of potential capital outflows that could pressure the yuan currency.
“But now it seems the PBOC no longer needs to stabilize the currency,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
“May economic data have showed weakness in the economy. I believe they would choose not to raise the interest rates now in order to keep the economic growth momentum.”
China reported weaker-than-expected activity data for May, adding to views the economy is finally starting to slow under the weight of a prolonged crackdown on riskier lending that is pushing up borrowing costs for companies and consumers.
Beijing is into the third-year of a sweeping regulatory clampdown on riskier lending practices. Intensifying concerns over credit quality in China after a spate of corporate bond defaults over the past few months have also put the focus on financial stability.
The yuan has strengthened about 1.7 percent against the dollar so far this year, on top of gains of about 6.8 percent in 2017.
In March, China gingerly raised market rates following the US move, in a symbolic reminder that Beijing is keeping an eye on global market trends.
Policy makers are also balancing those moves by taking the brakes off some liquidity controls. Markets expect the PBOC to make another cut in banks’ reserve requirement ratios (RRR) in the second half, with some speculation it could come as early as this month or July.
The PBOC’s surprise RRR cut in April and fears of a trade war with the United States have fanned market expectations that it may loosen policy to support the economy.
The Fed on Wednesday raised US interest rates by a quarter of a percentage point for the second time this year, and is expected to hike twice more in 2018.
The PBOC has kept its benchmark one-year lending and deposit rates steady since October 2015.
The central bank injected a net 70 billion yuan via reverse repos in open market operations on Thursday, according to the statement.


Oil mixed on tighter US outlook

Updated 21 August 2018
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Oil mixed on tighter US outlook

  • Traders said US markets were lifted by a tightening outlook for fuel markets in the coming months
  • The Iran supply cut may also be more than compensated for by production increases outside OPEC

SINGAPORE: Oil prices were mixed on Tuesday, with US fuel markets seen to be tightening while the Sino-US trade dispute dragged on international crude contracts.
US West Texas Intermediate (WTI) crude futures for September delivery were up 27 cents, or 0.4 percent, at 0306 GMT, at $66.70 per barrel. The contract expires on Tuesday.
The more active October futures were up 7 cents, or 0.1 percent, to $65.49 a barrel.
Traders said US markets were lifted by a tightening outlook for fuel markets in the coming months.
Inventories in the United States for refined products such as diesel and heating oil for this time of year are at their lowest in four years.
This is occurring just ahead of the peak demand period for these fuels, with diesel needed for tractors to harvest crops and the arrival of colder weather during the Northern Hemisphere autumn raising consumption of heating oil.
Outside the United States, Brent crude oil futures were somewhat weaker, trading at $72.18 per barrel, down 3 cents from their last close.
This followed the United States offering on Monday 11 million barrels of crude from its Strategic Petroleum Reserve (SPR) for delivery from Oct. 1 to Nov. 30.
The released oil could offset expected supply shortfalls from US sanctions against Iran, which will target its oil industry from November.
Because of the sanctions, French bank BNP Paribas said it expected oil production from the Organization of the Petroleum Exporting Countries (OPEC), of which Iran is a member, to fall from an average of 32.1 million barrels per day (bpd) in 2018 to 31.7 million bpd in 2019.
Still, traders said overall market sentiment was cautious because of concerns over the demand outlook amid the trade dispute between the United States and China.
A Chinese trade delegation is due in Washington this week to resolve the dispute, but US President Donald Trump told Reuters in an interview on Monday he does not expect much progress, and that resolving the trade dispute with China will “take time.”
The impact of the Iran sanctions is not yet clear.
China has indicated that it will continue to buy Iranian oil despite the US sanctions.
The Iran supply cut may also be more than compensated for by production increases outside OPEC.
BNP Paribas said non-OPEC output would likely grow by 2 million bpd in 2018 and by 1.9 million bpd next year.
“Depending on when pipeline infrastructure constraints are lifted in the US, non-OPEC supply growth by the end of 2019 may prove higher than currently assumed,” the bank said.
The search for new oil has increased globally in the last two years, with the worldwide rig count rising from 1,013 at the end of July 2016 to 1,664 in August 2018, according to energy services firm Baker Hughes.
The biggest increase was in North America, where the rig count shot up from 491 to 1,057 in the last two years.
How prices develop will also depend on demand.
“We see global oil demand growing by 1.4 million barrels per day in both 2018 and 2019,” BNP Paribas said, implying that global markets are likely to remain sufficiently supplied.