China interest rate cuts face internal and external constraints

China interest rate cuts face internal and external constraints, state media says in a front-page article. Reuters citing Chinese state media outlet, Financial News (this outlet is backed by the People’s Bank of China (PBOC)):

• China still has room to
  lower interest rates, but its ability to adjust monetary policy
  faces internal and external constraints
• “Objectively speaking, further interest rate cuts face
  ‘double constraints’ both internally and externally,” the
  newspaper said.
  “Internally, commercial banks’ net interest margins continue
  to narrow. Externally, the yuan exchange rate is also a factor
  that needs to be considered.”

Yep, a cut to interest rates would widen the gap with the US and mean more capital outflow, at the margin. The PBOC, every single day, is battling to keep the yuan from weakening. Today, for example, compare the model estimate and the previous close (ie where the market is actually trading) to the reference rate:

• PBOC sets USD/ CNY reference rate for today at 7.1149 (vs. estimate at 7.2574)

People’s Bank of China Governor Pan Gongsheng

This article was written by Eamonn Sheridan at www.forexlive.com.