MNI EXCLUSIVE: PBOC May Ease More, Cautiously, After MLF Cut

     BEIJING(MNI) - The People's Bank of China will proceed cautiously with

additional rate cuts and policy easing as GDP growth possibly dips beneath 6%

next year but inflation remains relatively high, unless the economy deteriorates

sharply or China-U.S. trade talks run into trouble, policy advisors and former

officials told MNI Tuesday, after an unexpected reduction in a key market

lending rate.

     "Some economic indicators have showed a marginal improvement despite the

headwinds ... and trade talks with the U.S are proceeding at a positive pace, so

a big rate cut may not be necessary ... and a gradual rate reduction would be

the best choice," said Sheng Songcheng, former director of the People's Bank of

China's statistics department. Monetary policy, including any further reductions

in interest rates or reserve requirement ratios, will continue to be fine-tuned

according to economic conditions, Sheng said.

     The PBOC unexpectedly lowered the rate on its 1-year medium-term lending

facility by 5 bps to 3.25%, the first MLF cut since February 2016. The move sent

the Shanghai Composite stock index up 0.54% to its highest level since Oct. 16,

and the yuan strengthened below 7 to the dollar on both offshore and onshore

markets, with the onshore USDCNY closing at 6.9975. The yield on 10-year CGB

Chinese government bonds dropped 5bps, according to Wind.

     Sheng attributed the rate cut to the soft economic performance, with GDP

growth falling to 6% in Q3, and the easing trend by global central banks. Its

relatively small size was appropriate considering that inflation is high due to

rising pork prices, he said, adding that a bigger rate cut might also trigger

speculation in the interbank market without significantly reducing real economy

lending rates.

     --PRIME RATE

     Advisors who spoke to MNI agreed that the MLF rate cut will guide the Loan

Prime Rate, the reference rate for banks' loan pricing, lower this month. Under

its recent interest rate reform, the PBOC made the LPR its main policy anchor,

replacing the previous benchmark policy rate.

     According to Peng Xingyun, deputy director of National Institution for

Finance and Development under the Chinese Academy of Social Sciences, the MLF

cut sent a clear signal that the central bank will continue to guide the prime

rate lower and further reduce real lending rates, in line with government

objectives.

     Inflation pressures, though, mean that the process will be gradual, Peng

said, noting that economic growth will be below 6% next year. Consumer prices

rose at an annual 3% in September, in line with the government's targetted

ceiling for 2019.

     "The central bank could choose to cut reserve requirement ratios or

interest rates," he said.

     --INFLATION

     A likely spike in inflation over 3% in Q1, due to China's Spring Festival,

will probably restrain the PBOC from further easing until later in 2020, Chen

Daofu, vice-director at the Financial Research Institute at the State Council's

Development Research Centre, told MNI. When easing does come, it may be

targetted at specific areas of the economy, Chen said.

     One advisor, who asked to remain anonymous, said the MLF move indicated

China intends to join other major economies in a rate-cut cycle, although risks

from property market overheating or excessive local government debt would mean

that it proceeds cautiously. GDP growth next year would likely be 5.7%-5.8%, the

advisor said.

     The yuan's rally on Tuesday came as the Financial Times reported that the

U.S. was prepared to offer to roll back tariffs on Chinese goods, but Guan Tao,

former director of international payments at China's State Administration of

Foreign Exchange, said the currency was also boosted by speculation that lower

rates would boost growth.

     The PBOC would like to see a stronger yuan, below 7 to the dollar, because

it would provide more leeway for future easing, the anonymous advisor said.

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

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