MNI EXCLUSIVE: PBOC To Guide Rate Down; Source Sees Q1 GDP -6%

     BEIJING(MNI) - The People's Bank of China will guide the benchmark loan

prime rate lower next Monday, as the economy's recovery from lockdown is slowed

by plunging export demand in the second quarter, sources and advisors told MNI,

with one saying GDP may have contracted by 6% or more from Jan-March and may

expand by as little as about 1% in all 2020.

     In the latest of a series of easing moves since mid-March, the PBOC cut its

one-year medium-term lending facility by 20 bps on Wednesday, as was widely

expected after it reduced its 7-day repo rate by the same amount on March 30.

The central bank has also announced two targeted cuts to banks' reserve

requirements since March 16, unlocking CNY950 billion in funds.

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

Development Research Center of the State Council, said the LPR could fall by 20

bps or more on Monday, potentially exceeding the fall in the MLF rate, as banks

contributing the quotes used to formulate it have also seen money market rates

and bond yields drop.

     This would still leave space for further easing of rates and reserve

requirements, Chen said, adding that while the monetary policy response to the

slowdown has been swift, with tools including CNY1.8 trillion in relending, the

PBOC nonetheless requires additional coordination from fiscal policy in order to

help struggling companies, he said.

     --INDUSTRIAL DEFLATION, CONSUMER INFLATION

     Targeted reserve requirement ratio cuts, for as much as 200 bps in the

second quarter, could be accompanied by measures to replenish big banks'

capital, enhancing their capacity to expand lending and to cope with bad loans,

said Feng Xuming, a senior fellow of National Academy of Economic Strategy at

Chinese Academy of Social Sciences. Targeted measures were key, with industrial

sectors experiencing deflationary pressures, while supply side problems fed

consumer price inflation, he said.

     But Zhang Yongjun, deputy chief economist at the China Center for

International Economic Exchanges, cautioned that with RRR already at

historically low levels, and at 6% for smaller banks, the PBOC might be running

out of room for additional quick reductions. Growth in the M2 measure of broad

money jumped to 10.1% in March, its highest year-on-year increase since the

middle of 2017, he noted. There may be only one or two further RRR cuts in the

rest of the year, depending on economic performance, he said.

     Data due on Friday may show the world's second largest economy suffered a

record contraction in the first quarter, with GDP coming in at -6% or worse, a

source close to policy makers told MNI. China's manufacturers will continue to

struggle in the second quarter, with exports potentially seeing a double-digit

contraction over the next two months, the source said.

     For the whole year, growth might be about 1%, although large-scale

government intervention could push it to 3% with difficulty, the source noted.

Officials thought in February that the epidemic would be brought under control

relatively quickly, as occurred with SARS in 2003, and that the economy could

return to its usual growth levels in the rest of the year. But the global spread

of the disease has scotched those hopes.

     About 460,000 Chinese firms closed permanently in the first quarter, with

more than half of these having been in operation for under three years,

according to Tianyancha, a commercial database that compiles public records. At

the same time the pace of creation of new firms slowed significantly. Around 3.2

million businesses were set up from January to March, a 29% drop from a year

earlier.

     --MAINTAINING EMPLOYMENT KEY

     Uncertainty over how long the pandemic might last has made long-term

policy-making difficult, particularly as the risk persists that the virus could

return from abroad, with cases reported recently in port cities neighbouring

Russia.

     Officials' key challenge will be maintaining employment, as companies

continue to fail, the source said, noting that 13 million graduates from

universities and technical schools will enter the workforce this year.

     Authorities are moving to introduce subsidies to stabilise employment,

although while these may encourage companies to keep employees hours worked

might still fall. Officials are also planning to distribute cash to laid off

workers. Previous official preoccupations with reducing debt and leverage will

be put aside for the moment, with the need to bailout suffered companies and

individuals taking priority, the official said.

     The fiscal deficit ceiling may be raised to 4% of GDP, up from 2.8% in

2019, the source said. Previously, sources had told MNI the maximum deficit

would be raised to only 3.5% of GDP.

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

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