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Fast Commment ChinaThe PBoC raises borrowing cost amid mixed growth signals

  1. Growth indicators mixed in November
  2. Interest rate hike with limited real impact
  3. We see growth slowing
Growth indicators mixed in November
Industrial production growth slowed slightly from 6.2 percent y-o-y in October to 6.1 percent in November, as expected by consensus. Fixed investments growth in year-to-date terms slowed as expected, but that corresponds to a rebound in the ordinary growth rate. Overall fixed investments were kept high by infrastructure projects, whereas construction (real estate investments) growth slowed another month, in a sign that the property boom is fading (see chart). Property sales growth, however, rebounded somewhat. Finally, retail sales growth increased, though slightly less than expected, from 10.0 percent y-o-y to 10.2 percent.
Interest rate hike with limited real impact
The activity data has been somewhat overshadowed in the newsflow by the central bank’s concurrent decision to raise borrowing costs. The People’s Bank of China (PBoC) raised its reverse repo rate by 5 basis points following the US Fed’s 25 basis points interest rate hike. The reverse repo rate acts as a floor for the money market rate. It was also raised following the Fed’s March hike but not following the June hike. The PBoC also controls money market rates via liquidity measures, and money market rates should not increase much due to the raised floor, as rates already were elevated (see chart). The money market rates are relevant for the exchange rate and also for commercial banks reliant on money market funding (including shadow banks). However, money market rates are less relevant for companies and households. Their loan contracts are, despite interest rate liberalisation, still often tied to the one-year benchmark lending rate, which has not been hiked in this cycle.
We see growth slowing
We expect growth to slow gradually ahead. The construction boom is very likely over due to the many measures taken by the authorities to avoid speculation and dampen the lively housing markets. The authorities are also eager to dampen overall credit growth and, in particular, shadow banking activity, and that, along with the measures to combat air pollution, will inevitably weigh on economic growth ahead.



Bjarke Roed-Frederiksen

Senior Economist

Latin America and China

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