China maintains easing stance as oil risks rise

China's monetary policy is set to remain on an easing path to support growth and domestic demand as the United States Federal Reserve held rates steady amid rising oil prices driven by geopolitical uncertainties in the Middle East, officials and analysts said.

Potential oil prices-led inflationary pressures facing China's economy are manageable and will be limited compared with many other economies, analysts said, helping underpin the relative stability and attractiveness of Chinese financial assets and the renminbi amid global market volatility.

In a meeting statement on Thursday, the People's Bank of China, the country's central bank, reiterated an appropriately accommodative monetary policy stance, vowing to use a mix of tools — the reserve requirement ratio, government bond trading, medium-term lending facilities and reverse repos — to ensure ample liquidity.

This followed the US Fed leaving the federal funds rate unchanged at 3.5 to 3.75 percent on Wednesday amid elevated inflation, highlighting the uncertainties arising from developments in the Middle East for the US economy, as higher energy prices could push up inflation.

Song Yu, chief China economist at UBS Securities, said that despite the US Fed holding rates steady, China maintains an easing bias to support growth and domestic demand, as the potential imported inflationary pressures it faces should be rather limited.

"Like elsewhere, oil price spikes may bring some imported inflation pressures to China, but the impact is relatively limited compared with many other economies, given the country's diversified energy supply, ample reserves and declining reliance on oil," Song said.

In this context, Chinese financial assets could stand out for their relative stability and diversification value, with the RMB also showing upside potential, Song added.

Global stock markets fell following the Fed's rate decision as investors grew concerned about persistent inflation and tighter global liquidity conditions.

The Dow Jones Industrial Average fell 1.63 percent on Wednesday. Japan's Nikkei 225 slumped 3.38 percent on Thursday, while China's Shanghai Composite Index fell 1.39 percent.

Despite Thursday's fall, the SCI has risen by 0.95 percent since the beginning of the year, while the US Dow has shed 3.82 percent.

"Against heightened geopolitical uncertainty, RMB assets have offered global investors a rare asset class that combines the potential for yield recovery and the attribute of risk hedging," said Cheng Shi, chief economist at ICBC International.

Cheng added that growing stagflation risks in the US could weigh on equities and bonds, while China's monetary easing and fiscal coordination would support stock market liquidity and corporate earnings recovery.

Amid the global market turmoil, the PBOC statement on Thursday vowed to firmly safeguard the stability of the stock, bond and foreign exchange markets.

The State Administration of Foreign Exchange also pledged on Thursday to enhance monitoring of cross-border capital flows and strengthen macroprudential management when necessary to ensure a steady foreign exchange market.

Morton Lo, a market analyst at financial trading platform FXTM, said fading expectations of US rate cuts could support the US dollar in the short term.

But such strength typically puts more pressure on other major currencies — such as the euro and the British pound — while the RMB may remain relatively stable, supported by China's resilient exports and the improving structure of its export sector, he said.

Stronger-than-expected economic data, including exports, in the first two months of the year, along with potential short-term imported inflationary pressures, suggest that the necessity and magnitude of further rate cuts in China may be smaller than previously anticipated, Song from UBS added.

According to Cheng, quantity-based tools such as cutting the reserve requirement ratio may be front-loaded this year to help maintain ample liquidity. Interest rates, meanwhile, are likely to be adjusted in a gradual and measured way.