MNI PBOC WATCH: Aug LPR To Hold Steady, Policy Easing Ahead

China's Loan Prime Rate will likely remain unchanged on Tuesday following July's cut, but continued weak demand will weigh on credit and challenge Beijing's economic targets, which may push the central bank to ease later this year.

The LPR is likely to hold at 3.35% for the one-year maturity and 3.85% for the over five-year tenor. Both rates unexpectedly fell last month by 10 basis points after the central bank lowered the 7-day reverse repo rate by the same level. (See MNI: China LPR To Hold In Aug, More Easing Eyed - Economists)

Policy advisors and economists told MNI the People’s Bank of China would cut its policy rate further to guide down the reference lending rate by 10-20bp over the remainder of 2024 following Q2’s poor GDP growth. (See MNI: PBOC Eyes Lower Rate For GDP Target, RRR Cut Optional)

GROWTH TARGETS

July data has pointed to a further slowdown of the economy following Q2's disappointing 4.7% y/y GDP print, which resulted in H1 GDP growth of 5% y/y. The result will make it harder for the economy to meet the government's full-year 5% growth target.

Both industrial output and investment slowed in July thanks to the soft domestic demand and the uncertain exports outlook, while the urban surveyed unemployment rate rose to 5.2%, its highest level since March. Urban unemployment for those aged 16-24, excluding students, also surged to 17.1%, the highest since the National Bureau of Statistics resumed publication of the data last December.

MNI recently reported China will need wider reforms to boost the economy over its urbanisation targets.

MONETARY RESPONSE

PBOC Governor Pan Gongsheng told Xinhua News Agency on Friday that the Bank will enhance policy strength and prepare “incremental measures… and increase coordination with fiscal polices”, stressing that monetary policy would remain supportive for Beijing’s 2024 economic goals.

However, weak credit demand has reduced the effectiveness of monetary easing. According to the PBOC, yuan-denominated term loans in July saw their first year-on-year decrease in 12 months, while M1 growth recorded its fourth consecutive print down, again hitting a new historical low.

The accelerated issuance of government bonds this quarter could help boost demand and shore up total social finance, however, disappointing economic performance could continue to fuel the bond rally despite the PBOC squeezing interbank market liquidity and ordering large, state-owned banks to sell CGBs.

The Bank may step in and sell bonds should the current moves fail to curb the bond rally, advisors told MNI.