MNI EXCLUSIVE: Advisors Call For Cautious PBOC Virus Response

     BEIJING(MNI) - Chinese policy advisors called for a cautious monetary

policy response to the coronavirus outbreak, telling MNI that any easing should

be targeted at affected sectors and avoid reversing the People's Bank of China's

current overall neutral stance.

     Speaking before the PBOC on Monday lowered its 1-year medium-term lending

facility rate by 10bps to 3.15%, an advisor close to top policy makers argued

that the epidemic will not alter the long-term trajectory of economic growth, so

measures should be short-term and respect market principles. Dependence on cheap

central bank funding could create dangerous distortions, and the stimulatory

impact of rate cuts will be diluted anyway because so much of the real economy

is still shut down to limit the spread of the virus, the advisor said,

requesting anonymity.

     Additional appropriate measures could include liquidity injections, as well

as quasi-fiscal moves, such as relending, pledged supplemental lending and

targeted bills, he suggested.

     In its response to the virus, the PBOC has provided as much as CNY300

billion to banks to pass on as loans at rates of 1.6% to targetted companies,

under its re-lending programme.

     --AVOID UNEMPLOYMENT SPIKE

     Policy should aim at avoiding volatility and a big jump in unemployment,

but should not interfere with economic logic when firms fail, the advisor said,

warning against extending excessive forbear-ance to companies suffering the

effects of the virus. On Friday, the China Banking and Insurance Regulatory

Commission's director of inclusive finance, Li Junfeng, told reporters that some

missed payments by companies struggling to cope with coronavirus will not be

allowed to affect their credit ratings or be counted as nonperforming loans on

banks' balance sheets.

     The CBIRC has guided state and joint-stock banks to lower lending rates to

small businesses in Hubei Province, at the centre of the virus outbreak, by

50bps versus last year's level. In Shanghai, authorities have encouraged banks

to provide a 25-basis-point discount versus the Loan Prime Rate to small

businesses and to companies either directly affected by the virus or working in

sectors vital for its combat. The one-year LPR is currently at 4.15%, although

the cut in the MLF could see it guided lower on Thursday.

     The LPR displaced the PBOC's benchmark loan and deposit rates to become a

key policy tool last August, since when its one-year rate has been reduced by

16bps and its five-year rate by 5bps. The central bank has not adjusted its

benchmark rates since 2015, although speculation over a possible reduction in

the deposit rate has mounted since comments by a member of its monetary policy

committee, Ma Jun, who said in a meeting last week that it could help banks to

lend more cheaply to companies.

     But a cut in the deposit rate may have only limited impact, noted Lian

Ping, director of Industry Development Research Committee of China Banking

Association, a think tank under the CBIRC. Lenders draw much of their deposit

funding from wealth management products with rates ranging from 3% to 4%,

already well over the one-year benchmark deposit rate, at 1.5%, he noted. They

also attract interbank deposits, which are more closely linked to money markets.

     --LOAN FORBEARANCE

     High inflation, expected at over 3% this year, would also make reducing

deposit rates - running at about 2.6% -- difficult, given the effects on savers.

     "Given the likely lack of impact, as well as the inflation aspects, I do

not think it is necessary to cut the benchmark deposit rate now," Lian told MNI.

     Banks are well prepared to cope with what is likely to be only a relatively

small increase in nonperforming loan ratios due to the economic impact of the

virus, advisors said.

     Loan loss provisions were running at 186.1% of impaired loans in 2019, Lian

noted.

     A loan manager in a bank in the east of the country told MNI that the

regulator has said that loans overdue by between 60 and 90 days would not in all

cases by classed as bad loans, keeping down changes in the overall NPL ratio.

The bad loan definition had only been broadened to include loans 60 days overdue

last year. But the loan manager added that bank executives, who can be held

accountable if loans fail, are still cautious before signing over credit to

companies, despite the ample supply of liquidity.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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