MNI EXCLUSIVE: PBOC May Further Trim Money Market Rates, RRRs

     BEIJING(MNI) - The People's Bank of China may make further reductions to

money market rates or banks' reserve requirement ratios after the first quarter,

as consumer price inflation moderates, policy advisors told MNI.

     Such moves would cut financing costs for infrastructure projects key to

officials' hopes of boosting the economy, as well as assist the drive for local

governments to lower debt burdens, said Zhang Ming, senior fellow at the

Institute of World Economic and Politics under Chinese Academy of Social

Sciences.

     Consumer price inflation, which has been squeezed higher by the effect of

African Swine Fever, should peak at about 5% in Q1, as pork prices ease and

seasonal elements fade, Zhang said. Headline inflation jumped to 2.9% in 2019,

close to the targetted ceiling of about 3%, even as a weaker economy was

reflected in producer prices, which fell by 0.3% due to soft commodity markets

and sagging domestic demand.

     Producer price inflation should recover somewhat, perhaps gaining to a

range between flat and 1%, as oil prices rise and manufacturers respond to both

easier monetary policy and the truce in the trade war with the U.S. by boosting

investment, Zhang said, but further cuts via money market rates or reserve

requirements remain warranted. The PBOC's benchmark loan and deposit rates will

likely be unchanged in the short-term.

     Sluggish producer prices may be a sign that China's industrial capacity has

again moved into surplus, auguring lower profits for many companies this year,

said a senior policy advisor to the central government, who also anticipated

additional PBOC measures and who asked for anonymity. Like Zhang, the advisor

expected the deployment of targetted tools such as the MLF rather than cuts to

benchmark interest rates, as concern persists over corporate and household

leverage.

     --TOTAL DEMAND SUBDUED

     Factory prices may remain in negative territory for the next two to three

years, the advisor told MNI, although he added that, overall, price and

employment indices are stable, and consumption should maintain a growth rate of

8% to 9%.

     The PBOC injected CNY300 billion via its one-year medium-term lending

facility (MLF) and CNY100 billion in 14-day reverse repos on Wednesday, to

offset demand for cash and tax payments and to maintain banking liquidity before

the Chinese New Year. They were the first open market operations since a

50-basis-point cut to reserve requirement ratios announced on Jan. 1, which

unlocked CNY800 billion.

     Targetted easing and the PBOC's overall "neutral stance" should mean that

while infrastructure investment could show some growth in 2020, investment in

the heavily-leveraged property sector could fall, said Chen Daofu, deputy

director at the Financial Research Institute of the Development Research Center

of the State Council. The net effect will see total demand in the Chinese

economy continuing to expand at the relatively subdued levels of 2019, he said.

     Zhang Ming agreed that overall demand would keep weak this year. Local

governments' existing debt burdens may restrict growth in infrastructure

spending, even if central authorities boost debt quotas, he said.

     The net result will be a fall in inflation from today's levels, said Zhang

Junwei, deputy director of a research body attached to the State Council. Even

rising wages will fail to push up the rate of increase in consumer prices, as

workers' salaries are eaten up by high housing prices, he said.

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

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