This month People’s Bank of China Governor Yi said monetary policy must ‘remain stable’ after noting: ‘domestic demand remains steady, which will help keep prices stable overall.’ His comments signal the PBoC will continue to leave its key interest rates unchanged throughout 2021.
Bank of Singapore, Bloomberg
The first chart shows the PBoC modestly lowered its seven-day reverse repo rate and its 1Y Medium-term Lending Facility (MLF) at the start
of the pandemic last year to 2.20% and 2.95%. But this year fears have increased that the PBoC will need to start raising interest rates to counter inflationary pressures. The second chart shows May’s producer price index (PPI) jumped to 9.0%YoY as commodities surged. But Yi expects consumer price index (CPI) inflation to remain under 2%, below the official 3% target for 2021.
Source: Bank of Singapore, Bloomberg
Indeed, May’s CPI inflation rate was only 1.3%YoY showing consumer price rises remain moderate.
Source: Bank of Singapore, Bloomberg
Credit growth is also slowing this year after borrowing jumped in 2020 during the pandemic. The last chart shows total social financing (TSF)
increased by 11.0%YoY in May versus 13.6%YoY last October. Full year credit growth of 11% in 2021 would match China’s likely real GDP growth
of 8.7% and inflation of 2% this year, keeping China’s debt-to-GDP ‘leverage ratio’ stable.
Thus, tame CPI inflation and slower credit growth is enabling the PBoC to maintain a stable monetary stance. Its neutral outlook supports risk
assets by allaying fears that interest rates will need to rise to counter inflationary pressures.
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