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According to Iris Pang, Economist at ING, the People’s Bank of China would like to  lower the interest rate to cushion against potential adverse impacts from the escalating trade war and  unwind some harsh damages (e.g. bonds defaults) caused by financial deleveraging reforms in 1H18.

Key Quotes

“However, when the 1D interbank pledged repo and overnight SHIBOR  fell below 2% – which is the level of the US’s Fed funds rate upper bound – it  triggered  capital outflow concerns from the inverted China-US interest rate spread.”

“This could be the reason the central bank has guided the interbank interest rates higher than the 2% level after a sharp fall in the first week of August.”

“The central bank  also guided the interest rate on 3M government deposit auction stable at 3.7% in August, the same as July after a sharp fall from 4.73% in June.”

“As we  expect another rate hike  from the Federal Reserve in September, China’s interest rate could be lower than the US again by then.”

“PBoC will have  to live with this negative spread because the economy needs lower interest rates to support investments and economic growth  in  this ongoing trade spat.”