MNI EXCLUSIVE: PBOC May Cut Reserve Requirements To Help Bonds

--PBOC Reserve Requirement Cut Would Facilitate Public Debt Sales

--Pace Of Interest Rate Cuts To Be Cautious

     BEIJING(MNI) - The People's Bank of China could cut reserve requirement

ratios in the next few weeks to support increased government bond issuance and

following an official call for banks to do more to help the real economy, but

interest rates may only see a small additional reduction later this year, policy

advisors told MNI.

     The PBOC is already providing stimulus via its relending programme and

liquidity operations, but it will be wary of expanding its balance sheet sharply

for fear of fueling asset price bubbles, said Chen Daofu, deputy director at the

Financial Research Institute of the Development Research Center of the State

Council. In the meantime, he said, lower reserve requirements would boost

lending, in line with Premier Li Keqiang's call last Wednesday to assist the

real economy as it recovers from pandemic shutdowns, as well as free up funds

for banks to purchase more bonds as the government increases issuance to

compensate for Covid-19.

     For their part, banks will be expected to lower lending rates, together

with making more unsecured loans and deferring repayments, but the PBOC's

concerns over financial risk mean it is unlikely to reduce policy rates for the

moment, said Chen. Regulators might also authorise higher provisions for

nonperforming loans, after Li Keqiang said banks should accept a CNY1.5 trillion

drop in profits for the good of the economy, according to Zhang Ping, deputy

head of the National Institution for Finance and Development under the Chinese

Academy of Social Sciences.

     A rise in risky leverage has prompted the PBOC to slow its pace of easing

in recent weeks, said Zhang Ping, who expected a 25-basis-point cut to the

central bank's lending and deposit rates by the end of 2020, mainly in order to

support public debt issuance.

     --LOAN PRIME RATE

     China's loan prime rate -- a benchmark for loans to companies and

households -- was unchanged in June, according to the central bank on Monday. It

was the second consecutive month the PBOC kept the rate steady, after a 20 bps

reduction since February, catching some advisors, including Chen, by surprise. A

crackdown on high-yield wealth management products offered by lenders should

have lowered their financing costs, boosting expectations the 18 contributing

banks would reduce their LPR quotations, Chen said.

     The PBOC also kept the rate steady this month on its medium-term lending

facility, a key tool for managing longer-term liquidity and a guide for the LPR.

     The outstanding volume of structured deposits ballooned to CNY12.1 trillion

as of the end of April, up more than CNY2.54 trillion from the end of 2019, as

companies tapped loans and bond markets to pump money into the high-yielding

products.

     --CARRY TRADES

     The PBOC, assisted by a stronger-than-expected economic recovery in May,

has begun to push money market rates closer to their policy equivalents, taking

some steam out of carry trades, said Chen.

     Improving credit indicators, such as M2's 11.1% growth in May, up from 8.4%

in January, and a CNY17.4 trillion increase in total social finance in the first

five months of 2020, show previous PBOC measures are working, said Zhang Ming, a

senior fellow at the Institute of World Economic and Politics under the Chinese

Academy of Social Sciences. The economy rebounded in the second quarter,

exceeding market expectations, with exports unexpectedly strong, he noted,

adding that this may have prompted the central bank's decision to slow the pace

of additional easing,

     Property markets have also accelerated, Zhang Ming noted. Resident housing

prices in tier-one cities rose 1.19%, in May the most since January 2018.

     Real estate companies' net funding from domestic and overseas bond issuance

reached CNY227.3 billion in the first quarter, just below the 2015-2016 peak,

according to a note from Huatai Securities. Sales in 33 major cities rose 14%

from a year earlier in the first week of June.

     But soft inflation, and declining producer prices, should grant some leeway

for additional easing, said Zhang Ming, noting that uncertainty over Covid-19

persisted.

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

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