MNI EXCLUSIVE: China To Cut Rates, But Cautiously

     BEIJING(MNI) - Chinese authorities are likely to announce a reduction in a

key benchmark rate for lending to companies on Thursday, and could continue to

cautiously guide down key interest rates in the coming months to help the

economy cope with coronavirus, policy advisors and former PBOC official told

MNI, stressing that officials remain wary of allowing excessive leverage to

develop.

     The Loan Prime Rate, based on quotes from 18 leading banks and announced by

the People's Bank of China on the 20th of each month, has been widely expected

to fall on Thursday since the central bank cut its medium-term lending facility

rate by 10 bps Monday, following separate 10 pbs reductions of its 7-day and

14-day reverse repo rates on Feb.3.

     "The cut in the MLF rate will guide down the upcoming LPR by at least 10

bps this month," said Lian Ping, director of the Industry Development Research

Committee at the China Banking Association , a think tank under the China

Banking and Insurance Regulatory Commission, "Next, the central bank could make

more efforts to lower policy rates, such as the MLF and LPR rates."

     The first quarter slowdown has been stark, Lian said, adding that low rates

in other major economies make further Chinese easing more feasible. While the

People's Bank of China has provided interbank markets with ample liquidity,

banks have not taken advantage of it to increase lending to companies in the

real economy, he said, making cuts in the MLF and LPR necessary.

     --HIGH LEVERAGE

     But, while advisors agree that the economy requires stimulus, they insisted

that any steps should be small and gradual. Debt levels and inflation are

already high, they noted, and the property market is prone to bubbles.

     Wu Ge, a former official at the PBOC, said monetary policy should "run fast

but with small steps."

     "We are seeing the (coronavirus) situation is improving and fiscal

measures, such as subsidies and tax cuts, are more precisely targeted, while

monetary policy usually has a time lag of about half a year," said Wu, now chief

economist at Changjiang Securities.

     Lowering interest rates and injecting liquidity would be positive in the

first quarter, with the disruption caused by the virus weighing on global

industrial supply chains, but if the economy picks up in Q2 and inflation

remains high, there would be limited room for further easing, he said.

     For the meantime, targeted easing is necessary to bail out small and

medium-sized companies already hit by the previous deleveraging campaign and now

suffering from production suspensions prompted by the epidemic. Otherwise, some

smaller companies, particularly in services, could go under, although firms

involved in infrastructure and property should pick up quickly once the virus

ebbs, Wu said.

     The central bank injected a record CNY1.7 trillion on Feb. 3 and Feb. 4,

but has since skipped open market operations on some days, reining in the net

liquidity injection for the month so for to CNY120 billion.

     The one-day reverse repo rate averaged 1.6% as of Wednesday, according to

data provider Wind, 89bps lower than on Feb 3, while 7-day and 14-day rates

dropped by 48 bps and 47 bps respectively.

     --LPR REFORM

     The lowering of the LPR comes as its importance continues to rise following

the PBOC's decision last year to emphasise it more than its traditional

benchmark rates. The LPR became the only benchmark for banks' new lending from

Jan. 1 and outstanding loans will be moved to the rate between March and the end

of August.

     This transition could reduce the weighted average loan rate by 4-5 bps if

the one-year LPR remains at its current 4.15% and loans continue to increase by

12.5%, according to a note from Bank of Communications. Outstanding loans

denominated in yuan stood at CNY153.11 trillion at the end of last year,

according to the PBOC.

     The changes will make the LPR a more effective instrument in guiding real

lending rates down, Lian said. They should also make it easier for the PBOC to

influence the LPR rate via its medium-term lending facility.

     But lower rates could also hurt banks' net interest margins, according to

Zong Liang, chief analyst at the Bank of China's Institute of International

Finance, adding that regulators may have to relax requirements for

profitability. Authorities may also need to take further measures to boost

banks' incentives to lend to smaller businesses, such as by encouraging

recapitalisation and via targeted cuts in reserve requirement ratios.

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

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$]