The central bank stepped up liquidity injections to the banking system today, contrary to market expectations of a more hawkish stance. Market perceptions that higher interest rates are necessary to fulfill Beijing’s deleveraging goals are misplaced, and today’s extra medium-term liquidity injection appears designed to correct those views.
Given the headwinds building in China’s economy from slowing property construction and weaker fiscal and credit impulses next year, more monetary policy support will be necessary to stabilize China’s recovery. The emergence of deflationary pressure in producer and consumer prices leaves the PBOC few choices other than to guide market interest rates and deposit rates lower. But the slowing recovery and additional easing steps are unlikely to slow the appreciation trend in China’s currency.
