China’s central bank reiterates easing pledges amid policy dilemmas

Officials at the People’s Bank of China said at a Tuesday briefing that they will ramp up support for the economy with measures like lower interest rates and reducing the amount of cash lenders must hold as reserves to free up liquidity. They also again promised to defend the yuan, and warned against the risk of an overheated bond market.

That followed a meeting Monday by the China Securities Regulatory Commission, where it said it will work with the PBOC to enhance the effectiveness of structural monetary policy tools and strengthen market stabilization mechanisms.

The comments add to a chorus of verbal support from Chinese officials on tackling long-simmering issues like weak demand and a property market slump. Calibrating the right policy fix for the structural problems ailing China’s economy has been complicated by unfavorable market forces, with the yuan under pressure, government bond yields tumbling and equities off to a weak start this year.

Bank lending data earlier showed weak bank loan growth last month, and Capital Economics expects sluggish private demand to keep credit growth subdued in the foreseeable future. Low inflation looks set to keep lending rates restrictive despite PBOC easing, which together with continued declines in asset prices could keep private demand muted, economists said in a note.

As investors rush to safe-haven assets, the 10-year Chinese government bond yield plunged to an unprecedented 1.6% this month, widening the yield gap between China and the U.S. and further weighing on a yuan buckling under broad U.S. dollar strength.

Uncertainty over potential tariff hikes from the U.S. have added another layer of gloom, and steadying the currency has become a top priority for policymakers.

Xuan Changneng, deputy PBOC governor, told reporters Tuesday that the central bank is determined to stabilize the yuan and enforce penalties for market-distorting behaviors. Authorities have taken several measures to put a floor under the wobbling yuan, including setting a strong daily reference rate to help regulate fluctuations.

The yuan’s stumble has put the PBOC in a tough spot, with economists wary that interest-rate cuts will add to the pressure.

The central bank is stuck between supporting the economy and fighting deflation—its growth and price stability objective—and fulfilling its mandate on safeguarding the currency, stock market, and bond yields, said economists at Barclays. A further deterioration in investor sentiment and dramatic selloffs at the start of the year have exacerbated the dilemma, they wrote in a note.

And those aren’t the only constraints the central bank faces.

“Lower lending rates would also compress already thin bank margins," Wei He, economist at Gavekal Dragonomics said in a note. “The PBOC generally prefers to conserve its policy space by avoiding sizable rate cuts, perhaps in part because it worries that it may not be able to easily raise rates later," He added.

That said, economists still expect a sizable slash to rates later this year, as the Chinese leadership in December adopted a “moderately loose" monetary policy stance for the first time in 14 years.

“We would not rule out that the PBOC [would] conduct an RRR cut in the near-term to inject liquidity," Nomura analysts said in a note. They flag that 995 billion yuan of medium-term lending facility loans maturing on Jan. 15, tax payments due the same day, and cash demand into the Lunar New Year holiday are likely to lead to funding tightness.

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