Across The Border | PBOC’s hands tied because of sustained capital outflows
Central bank has found itself ‘forced into’ some of its monetary tightening measures, as domestic inflation heats up and expectations increase for more Fed rate rises this year
China’s capital outflows are likely to persist for the rest of this year, which will constrain the People’s Bank of China’s (PBOC) monetary policy and lead to a more activist fiscal policy, if the government hopes to achieve its growth target, according to analysts.
“[China’s] monetary (real loan rate) and fiscal policy was the loosest in 20 years before the current NPC (National People’s Congress),” said Sean Darby, chief global equity strategist for Jefferies in a recent report, adding that’s helped fuel a housing boom and pushed the country towards achieving 6.7 per cent growth in 2016.
However, the PBOC has found itself “forced into” some of those monetary tightening measures, as domestic inflation heats up, he added.
Another important reason is the faster pace of US interest rate increases, which will lead to a wider gap in rates between China and the US, prompting capital to leave China.
“There is a limit to which capital controls can be effective in stemming outflows, particularly if real interest differentials widen,” Darby said.
