MNI EXCLUSIVE: PBOC May Guide Prime Rate Lower Next Week

     BEIJING(MNI) - The People's Bank of China is likely to guide its new prime

lending rate lower next week, when the Fed is expected to ease, but it may hold

its medium-term facility rate steady, leaving itself ammunition for further

stimulus if necessary later this year, Chinese government advisors told MNI.

     "The LPR is likely to continue to be lowered, but the central bank may pace

itself when cutting the MLF rate, considering it just reduced reserve

requirement ratios last week," said Zhang Ming, senior fellow at the Institute

of World Economic and Politics under the Chinese Academy of Social Sciences, "It

takes time to see the effects of the RRR cut."

     The PBOC said last Friday it would pump CNY900 billion into the banking

system with its second across-the-board RRR cut this year. The move sparked

expectations of more easing moves including an MLF cut aimed at guiding the

prime rate lower as soon as next week, when the Federal Reserve is set to make a

25-basis-point reduction in rates.

     While there is room for the PBOC to cut its open market operations rates,

including the MLF and the 7-day repo rate, Zhang said the central bank is likely

for the moment to rely on the recent lowering of RRRs, which allows banks to

hold onto to more cash, to reduce the quotations from 18 designated lenders used

to calculate the prime rate. The PBOC's reformulation of its interest rate

framework last month should improve transmission to real economy lending, Zhang

said.

     Chen Daofu, vice-director of the Financial Research Institute at the State

Council's Development Research Centre, said the central bank should ease

risk-free rates, such as the prime rate, to meet the State Council's call for

lower real economy borrowing costs.

     "The LPR announced on the 20th this month should go down," he predicted,

adding that further easing measures, including cutting policy rates, could be an

option later in the year.

     When the central bank unveiled its revamped one-year LPR last month, it was

set at 4.25%, 10 basis points lower than the one-year lending benchmark rate

which had been its previous focus.

     The first opportunity for the PBOC to announce a lower LPR will be Sept.17,

the day before the expected Fed cut when CNY265 billion yuan of MLF loans will

mature.

     Zhang Yongjun, deputy chief economist at the China Centre for International

Economic Exchange, a high-level think tank, said relatively high consumer price

inflation would constrain the pace of rate cuts, although there is still room

for lowering RRRs further later this year, which would in turn ease money market

rates and reduce the cost of real economy borrowing.

     Moves by more global central banks to cut will make it easier for the PBOC

to follow suit, even if the fear of stoking asset price bubbles in stocks and

property restrains the pace at which it does so, said Niu Li, senior fellow at

the National Information Centre's Economic Forecasting Department which is

affiliated to the National Development and Reform Commission.

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

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