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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
     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
     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:
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,M$$FI$,MN$FI$,MN$FX$,MN$MM$]

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