MNI: China LPR To Hold In Aug, More Easing Eyed - Economists

MNI (BEIJING ) - China’s Loan Prime Rate will likely hold steady next Tuesday amid an unchanged 7-day reverse repo rate, but sluggish credit demand and soft economic performance will likely push the central bank to ease later this year, economists told MNI.

The Loan Prime Rate will likely hold at 3.35% for the one-year maturity and 3.85% for the over five-year tenor next Tuesday. 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 PBOC WATCH: PBOC Cuts 7-Day Rate As Reconfigures Framework )

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, told MNI a steady 7-day repo rate would suggest a stable LPR, following the central bank’s move to diminish the importance of the medium-term lending facility last month as its favoured policy rate.

Dong noted the PBOC will likely wait until September to ease via an interest-rate cut or a lower Reserve Requirement Ratio. Fiscal authorities will accelerate bond issuance in Q3 and the U.S. Federal Reserve could starts cutting rates next month, he continued. (See MNI: PBOC Eyes Lower Rate For GDP Target, RRR Cut Optional)

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

WEAK CREDIT

July Money supply data issued by the PBOC on Tuesday prompted wide disappointment as yuan-denominated term loans saw their first year-on-year decrease since July 2005.

The unexpectedly soft total social finance result showed households had once again shifted towards deleveraging. Corporate short-term loans, meanwhile, declined y/y for their sixth consecutive month, while medium- to long-term loans also fell y/y for their 13th consecutive month. M1 growth recorded its fourth consecutive print down, again hitting a new historical low.

Liang Si, researcher at the Research Institute of the Bank of China, said the continuous y/y decline in credit demand had led to less effective monetary policy. However, local-government bond issuance will likely accelerate in H2, and fixed-income financing will continue to increase, providing some support to total social financing, he predicted.

MORE STIMULUS

Recent inflation, exports, investment and consumption data all indicated further stimulus was needed to support the economic recovery.

Wang Qing, chief macroeconomic researcher at Golden Credit Rating, said the economy continued to slow in August following Q2 weakness, primarily due to the ongoing softness in the real-estate sector and weakened growth drivers, particularly among household consumption and private investment.

Domestic demand’s core issue remains the continued adjustment in the housing market, Wang added, noting stronger policy measures are needed to address the sector’s decline.