The People’s Bank of China (PBOC) might be on the verge of a significant shift in its monetary policy, potentially leading to a series of rate cuts in 2024. This move comes amid a more aggressive stance by the US Federal Reserve on interest rates, as fears of a recession grow.
Recent actions by the PBOC, including an unexpected interest rate cut two weeks ago, could be just the beginning. Economists now speculate that the central bank might implement up to three rate reductions this year, a scale of easing not seen in recent years. Xu Yongbin, co-chief investment officer of U-Shine Private Equity FD Mgt Co, suggests that the PBOC could cut rates as soon as September, depending on economic conditions.
China’s central bank has been in a tight spot, balancing domestic economic needs with the impact of US monetary policy on the yuan. The PBOC had previously kept rates steady to defend the yuan amid a rising Fed rate and capital outflows. However, a recent rally in the Treasury market has eased pressure on the Chinese currency, providing some breathing room for the PBOC.
Currently, traders expect the Fed to cut rates by at least a full percentage point by the end of the year, starting possibly in September. This development might reduce some of the PBOC’s concerns and allow it to focus on stimulating the Chinese economy.
In recent weeks, the gap between US and Chinese 10-year government bond yields has narrowed, making Chinese bonds relatively more attractive. This shift has led analysts to anticipate that the PBOC might act soon. Macquarie Group Ltd. forecasts at least two rate cuts by the PBOC for the remainder of 2024, double the previous expectations.
The PBOC’s recent easing, including a reduction in the seven-day rate and adjustments to the one-year policy loans, signals a shift in policy focus. Previously, economists did not expect further cuts through the end of the year, but this outlook has changed with the new data.
Bloomberg Economics highlights that fading concerns over yuan depreciation, especially with anticipated US rate cuts, could clear the way for the PBOC to implement further reductions to support China’s recovery. Chang Shu and David Qu of Bloomberg Economics emphasize that the economy needs more stimulus, and more aggressive rate cuts could be part of the solution.
Despite these potential moves, the PBOC faces challenges. Previous rate cuts have had a limited impact on boosting demand amid a persistent housing downturn and weak job market. Moreover, commercial lenders’ narrow profit margins and the limited effect of past rate cuts add to the complexity of the situation.
The PBOC’s decisions will ultimately depend on domestic economic needs rather than solely on the Fed’s rate moves. In the event of a global recession triggered by a hard landing in the US, the resulting risk-averse sentiment could strengthen the dollar, exerting additional pressure on the yuan and potentially constraining the PBOC’s policy options.
Standard Chartered’s Ding Shuang maintains a cautious stance, predicting a 10-basis point cut to the seven-day reverse repo rate in the fourth quarter of this year and the first quarter of 2025. The one-year policy loan rate could see a larger reduction. Ding notes that if the property sector stabilizes next year and the US experiences a soft landing, China may not need to align perfectly with the Fed’s rate-cutting trajectory.
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Author Faith Yakubu 
