Morgan Newfield says PBOC could raise interest rates this month

Morgan Newfield analysts say next PBOC governor may increase borrowing costs after Fed announces interest rate hike later this week.

The People's Bank of China (PBOC) headquarters in Beijing, China.

China’s central bank will likely need to react to an anticipated increase in US interest rates later in March.

Analysts at Taipei, Taiwan based investment house, Morgan Newfield, say that it is widely expected the long-standing governor of the People’s Bank of China, Zhou Xiaochuan, will be replaced during this year’s annual meeting of China’s parliament.

China’s annual meeting of parliament will end one day before the US Federal Reserve announces its rate decision leaving the new governor of the PBOC with a big first assignment to tackle.

Morgan Newfield analysts say Liu He, a trusted confidant of Chinese President Xi Jinping, is a likely successor.

Last year, the US Federal Reserve increased interest rates three times and, in March and December, the PBOC followed suit, raising borrowing costs by 10 and 5 basis points. Morgan Newfield economists anticipate a similar move by the PBOC if the Fed hikes rates again later this month.

Compared to its regional peers and other large economies, Chinese market rates are already high with the government’s stringent deleveraging policies placing further pressure on financial conditions but Morgan Newfield economists believe that China wants to keep up with its global economic peers and might well implement another rate increase.

While an increase in official benchmark rates is not anticipated, Morgan Newfield economists say it is likely the PBOC will hike rates when the Federal Reserve does but that the increase will probably be less significant. One year lending and deposit rates have remained consistent for the past 3 years.