China Unexpectedly Cuts Short-Term Lending Rate

China Unexpectedly Cuts Short-Term Lending Rate
November 19, 2019


The greenback rose 0.36% against the Chinese yuan to trade at 7.0288 yesterday after the People’s Bank of China made an unexpected decision to slash its short-term lending rate, the first of its kind in more than four years. The rate cut is seen as an attempt to reverse the economic slowdown. The central bank of China determines the yuan’s mid-point (reference) rate, after which the onshore yuan (CNY) is permitted to move 2% higher or lower than the reference rate.

The seven-day repurchase rate was cut to 2.50%, from 2.55% by PBoC. It was the first rate cut since October 2015. Last month, the bank had slashed its medium-term lending rate for the first time in three years as the economy expanded at its slowest pace in almost thirty years.

Likewise, the one-year medium-term lending facility rate was slashed by five basis points to 3.25%, from 3.30%. Analysts at Capital Economics anticipate additional rate cuts in the months ahead, leading to a decline in interbank rates and retail prime lending rate.

Regarding future rate cut expectations, Julian Evans-Pritchard, Senior China Economist at Capital Economics, said: “We anticipate another 70 basis points of cuts to the 7-day reverse repo rate by the middle of next year.”

The economist also detailed the factors that will be monitored by the central bank before announcing further easing measures. “The PBOC will focus more on the downbeat signals from easing core consumer price inflation and deepening factory-gate deflation, as well as broader evidence of economic weakness.”

In Q3 2019, China’s GDP grew only 6%, the weakest rate of growth in 27 years. One of the main reasons for the weak economic expansion is the unresolved trade dispute between the US and China, which slowed down overseas demand and investment.

The IMF (International Monetary Fund) predicts China to grow at 6.1% in 2019 and 5.8% in 2020. During the October monitory policy meeting, the bank did not make any changes to its benchmark (one-year loan) interest rate of 4.20% and five-year lending rate of 4.85%.  Capital Economics anticipates the LPR (loan prime rate) to be lowered by another 5 basis points tomorrow. The research firm also expects the central bank to announce additional steps to improve lending amid weak economic growth.

Notably, as per a separate data released yesterday, foreign direct investment (FDI) increased 7.4% y-o-y in October to CNY 69.20 billion. Between January and October, the FDI increased 2.9% on a y-o-y basis. The unanticipated rate cut is expected to keep the greenback bullish against the yuan in the short-term.

The USD/CNY currency pair is ascending after consolidating at 7.01500 levels. The stochastic oscillator is also in the bullish region. Therefore, we can anticipate the uptrend to continue in the short-term.

CNY - techncial analysis - 19th Nov 2019

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