MNI EXCLUSIVE: China Benchmark May Ease After Reverse Repo Cut

     BEIJING(MNI) - A benchmark for setting Chinese companies' cost of borrowing

may edge lower after the People's Bank of China cut a money market rate

Wednesday, but further monetary easing may be limited to lowering banks' reserve

requirements as economic data improves and inflation rises in the first quarter

of 2020, former PBOC officials and policy advisors told MNI.

     The central bank cut its 14-day reverse repo rate by 5bps on Wednesday, the

first cut since February, 2016, in a move that means that the Loan Prime Rate

due to be announced on Friday should be slightly lower. Investors have been

expecting it to stay stable at 4.15%.

     The PBOC, which left its medium-term lending facility rate steady on

Monday, may have timed the reverse repo move to guide the LPR lower, said Sheng

Songcheng, former head of the PBOC's Statistics and analysis department.

     A lower LPR would support investment and consumption in the real economy,

Shong said, at a time of ample interbank funding and an uncomfortably swift rise

in consumer prices.

     "If inflation continues to rise sharply next year, an interest rate cut

would be put off or be very small," he said.

     With last week's policy-setting Central Economic Working Conference

stressing the need to lower financing costs throughout the economy, the LPR is

likely on a downward trend. But unless the PBOC reduces other benchmarks,

particularly its MLF rates, the fall in companies' borrowing costs will be

small, advisors said.

     --INFLATION

     The rate of increase in consumer prices jumped to 4.5% in November, the

highest since January, 2012, and taking 11-month inflation to 2.7%, near the

annual target of around 3%. Additional demand around Chinese New Year could push

inflation over 5% in Q1, reducing room for further monetary easing, said Wu Ge,

a former official in the central bank's monetary policy division and now chief

economist at Changjiang Securities.

     It would be better for monetary policy to remain stable in the absence of

economic volatility, Wu said. Fiscal policy should play a major role in

supporting demand, together with a cautious easing of restrictions on investment

in infrastructure and property.

     The spike in inflation could prove temporary, with Ning Jizhe, a senior

official serving as director of the National Bureau of Statistics, telling MNI

that pork imports, including from the U.S., should limit any further impact of

African Swine Fever on prices during the Spring Festival. Underlying inflation

is only about 1.5%, he noted.

     But, with ordinary bank customers earning only 1.5% on one-year deposits,

rising inflation means the value of their savings is falling in real terms --

also a factor for the PBOC, a person close to the central bank told MNI.

     --RESERVE REQUIREMENTS

     While further reductions in PBOC benchmark rates do not appear imminent, it

is possible the central bank might reduce lenders' reserve requirement ratios in

order to meet demand for liquidity in January. Additional needs might total over

CNY1 trillion, considering likely issuance of infrastructure-backed

special-purpose bonds by local governments and payments of dividends and bonuses

by companies, according to an official at a big state-owned bank, who requested

anonymity.

     "Lenders usually like to provide loans and buy bonds at an intensive pace

in the early months to ensure returns for the whole year," the official said.

     Advisors had differing views on the likelihood of an RRR cut. While Fei

Zhaoqi, monetary research director at the Institute of Finance and Banking of

the Chinese Academy of Social Sciences, said such a move would serve the PBOC's

goal of deepening reform of its interest rate framework, Sheng cautioned that

even though the central bank would support local government debt issuance set

for the first month of the year it would only decide on an RRR cut or

alternative means of liquidity provision depending on the circumstances at the

time.

     China's industrial production and consumption grew at the fastest rates for

five months in November, and the official manufacturing PMI rose back into

expansionary territory for the first time in six months.

     Sheng said the economy has touched bottom for now and this year's growth

should be 6.1% or more.

     "For next year, the GDP will remain at 6% or even higher with current

policies," Sheng predicted, "The truce in the China-U.S. trade conflict and the

recovery of the global economy will boost external demand, and the reduction of

individual taxation this year will support consumption."

     This brighter outlook should ensure stability of the yuan, Sheng said.

     "The yuan will be stable in 2020 or even strengthen slightly past the 7

level," he said, "China will need to significantly increase imports from the U.S

next year to reduce its trade surplus, so a weak currency would not benefit the

country."

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

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