PBOC’s policy flip-flop sows confusion over timing of rate cuts

AT A rare press briefing back in September, China’s central bank chief Pan Gongsheng unveiled a stimulus blitz that spurred optimism for one of the biggest policy shifts in a decade. But since then, market watchers wanting more support have been left scratching their heads.

The People’s Bank of China (PBOC) has not cut interest rates in nearly half a year despite its most pro-easing stance in 14 years. Officials have repeatedly hinted at lowering the amount of cash banks must hold in reserve but have not followed through. And an experiment in government bond-buying experiment has been halted, sharply tightening interbank liquidity.

The policy lull is depriving the economy of stimulus and delaying expectations for monetary easing in 2025. With Beijing’s priorities shifting in favour of the yuan, global banks such as Citigroup, Nomura Holdings and Standard Chartered now see rate cuts in the second quarter instead of the first. Goldman Sachs also warns of a later reduction in banks’ reserve requirement ratio (RRR).

“The PBOC under Pan has signalled a lot of policies and it usually follows through on them – but not always,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong. “The danger is that markets might start to question his signalling in other areas, such as currency policy.”

For investors, any open criticism of the PBOC’s flip-flop risks leading to a backlash from authorities. But the uncertainty has shown up in some notes from analysts, with Standard Chartered saying the recent decisions have sowed “confusion about the policy direction.”

With no clear explanation from Beijing, theories abound for the policy pivot. Economists at TS Lombard link it to Donald Trump’s trade war, suggesting the PBOC is prioritising yuan stability over rate cuts, effectively making “interest rates hostage to tariffs” and blurring economic and currency objectives.

There’s also a view that the PBOC is tightening liquidity rather than easing to warn bond bulls their fingers could get burned in so-called haven assets. But it’s unclear if Pan would be able to resist cutting rates for long with the economy in deflation.

Another explanation: The Federal Reserve’s ongoing battle with inflation is playing a part, according to Ecaterina Bigos, chief investment officer of core investments for Asia ex-Japan at AXA Investment Managers, which oversees more than US$800 billion. She said Pan is now in a waiting pattern for Jerome Powell to move first.

“They need to see the tariffs’ implications, the size of those, the timing of that, to craft their own monetary and fiscal policy accordingly,” Bigos said.

The PBOC’s tricky balancing act between unleashing stimulus and defending the yuan will further test an economy stuck in the worst property slump since China began privatising housing in the 1990s. Domestic consumption and investment demand are so weak the country is headed for its longest deflation since the 1960s. Those challenges overshadow a recent rebound in market sentiment sparked by DeepSeek’s new artificial intelligence model.

The PBOC did not immediately reply to a fax seeking comment. The central bank acknowledged earlier this month that “foreign economic” factors were influencing the pace of policies.

Global influence

Chinese President Xi Jinping’s fixation on building a “powerful currency” has made safeguarding the yuan a bigger policy priority over the past two years, as officials believe a degree of stability is required to broaden its global use. Underscoring that point, Pan in February said a steady yuan “has played a key role in maintaining global financial and economical stability”.

The implications of that push for domestic monetary policy are now beginning to play out, as China faces off against a US president who labelled China a currency manipulator during his first term.

Rather than letting the currency weaken to relieve exporters hit by the biggest single tariff hike of the Trump era, the PBOC has supported the exchange rate by keeping its daily fixing – a reference rate around which the yuan is allowed to trade – stronger than the key 7.2 per US dollar threshold.

It also used verbal warnings and tweaked capital controls as part of an effort to prevent the risk of a large move in the yuan.

Selling pressure on the yuan is unlikely to fade as Trump’s tariffs reinforce the US dollar’s strength and stoke fears of faster inflation in the US. The PBOC may need to coincide its easing moves with periods when the currency is under less strain, or delay the use of assertive measures such as cuts to policy rates or the RRR.

That means real borrowing costs – which are adjusted for falling prices – remain elevated. That could frustrate Xi’s recent efforts to send a pro-growth message, a push that was on display when he met with Chinese tech bosses Monday just weeks before Beijing is expected to unveil an ambitious GDP target of about 5 per cent for 2025.

Another reason Pan cannot easily borrow from the last trade war’s playbook is the yuan’s much weaker level.

When Trump announced additional tariffs on solar panel imports in January 2018, the currency traded at 6.3 versus the US dollar and then depreciated by about 10 per cent over the next nine months to almost 7. Now, the PBOC is fighting to stabilise it around 7.3 per greenback.

The PBOC could step up the use of its less high-profile tools to ensure there’s enough liquidity in the economy, with instruments such as its newly established outright reverse repurchase agreements. And a fund designed to ensure stock market remains a possibility.

Even apart from the yuan, the PBOC has reasons to be cautious.

It’s fast approaching the limit for traditional easing, with the policy rate used by the central bank to anchor market borrowing costs at a record low of 1.5 per cent. Meanwhile, the average RRR for banks is at 6.6 per cent, moving close to the 5 per cent level that officials previously implied was their preferred minimum threshold.

The solution for keeping the economy humming likely lies outside the central bank, according to Lu Ting, chief China economist at Nomura.

“It is still challenging for the PBOC to defend the renminbi by itself,” he said. “Fiscal policy should play a more dominant role in boosting domestic demand and stabilising growth, offsetting pressures on external demand.” BLOOMBERG