MNI EXCLUSIVE: PBOC May Guide Down Prime Rate In March:Advisor

     BEIJING(MNI) - The People's Bank of China could further guide down the

benchmark loan prime rate on March 20, via cuts to its medium-term lending

facility or money market policy rates soon, a prominent policy advisor told MNI,

with another saying that the PBOC had some space for additional easing as Fed

cuts support the yuan even as the Chinese trade balance falls into deficit.

     "As China's economy has suffered a heavy blow from the coronavirus

outbreak, the PBOC will need to further ease its policy bias, and the bigger

interest spread [with U.S. Treasuries] will help expand the space for rate

cuts," said Zhang Ming, senior fellow at the Institute of World Economics and

Politics of the Chinese Academy of Social Sciences, one of China's top

think-tanks.

     MLF or money market policy rate cuts could come soon, pushing down

companies' real borrowing rates, as reflected in the LPR, he said. The MLF rate

may be cut by 25bps this year, guiding the LPR down by 40-50bps .

     Such moves would likely be followed later by more reductions in banks'

reserve requirement ratios and policy rates, Zhang said.

     Primer Li Keqiang called for reserve requirement ratio cuts "soon" during a

meeting on Wednesday, which analysts say could mean the PBOC takes action as

soon as this week. Zhang predicted a 0.5-percentage point RRR cut soon at a pace

aimed at cushioning the epidemic's hit to small and medium-sized companies.

     Chen Daofu, deputy director at the Financial Research Institute of the

Development Research Center of the State Council, agreed that the PBOC could

undertake additional easing, although he cautioned that monetary policy could

not constitute the bulk of the official response to the slowdown prompted by the

epidemic.

     Lower Chinese rates would ease pressure on the yuan to appreciate, a

tendency which could make life still more difficult for manufacturers already

suffering the economic effects of the virus, Chen noted.

     The yuan touched 6.9090 per dollar on Monday, its strongest since Jan. 22,

as the interest rate differential between Chinese and U.S. 10-year Treasury

bonds hit a record high of around 200 basis points, well above the 80-100

basis-point comfort zone previously mentioned by PBOC Governor Yi Gang.

     --HIT TO EXPORT DEMAND

     As the virus spreads globally, Chinese exporters not only have to contend

with the disruption to their own operations, but also with the hit to demand

from foreign markets, Zhang said, noting that China's Jan-Feb trade deficit, the

first in two years, may persist. Exports contracted by 17.2% in dollar terms in

the first two months of the year, leading to a deficit of USD7.1 billion.

     First quarter trade data may also reveal a deficit, Zhang said.

Nonetheless, he said, there was still a possibility that the yuan could

strengthen to 6.8 by the end of March, as China controls the spread of the virus

and stimulus spurs recovery even as uncertainty rises internationally. Any

abnormal capital flows triggering a sharp appreciation of the currency would

prompt a response by the PBOC, Zhang said, although he added that it was likely

that any exchange rate weakness this year would also be capped, at about 7.2 to

the dollar.

     The advisor, though, pointed to multiple factors of uncertainty, including

the extent of China's stimulus, the performance of infrastructure spending and

the property sector, and the trajectory of the local equity market. A

worse-than-expected Chinese slowdown could unsettle forex markets, Zhang added,

noting that Beijing may have to ask the U.S. to extend deadlines for it to

increase imports of American goods under their trade deal.

     Less than a third of small and medium-sized businesses are operating

normally, the Ministry of Industry and Information Technology said last week,

although more than 80% of the 2,552 companies participating in international

trade have returned to work, according to a survey by China's customs

administration on Saturday.

     Han Huishi, head of investment research at state-owned China Construction

Bank, predicted the yuan would fluctuate in a range of 6.8 to 7.2 against the

dollar this year. Key factors will be whether China's trade balance remains in

surplus, as it copes with U.S. tariffs and weak international demand and supply

chains, and also the risk of hard-to-counter outflows of speculative capital.

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

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