MNI EXCLUSIVE: PBOC To Guide Rate Lower Despite Jan Surprise

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

prime rate lower, providing additional liquidity or encouraging banks to lend

more, despite surprising analysts by leaving the key benchmark unchanged earlier

in January, sources close to policymakers told MNI.

     The PBOC may also cut reserve requirement ratios or rates on medium-term

lending facilities, which would feed through to the LPR, but it may not move in

the first quarter, a source familiar with policy operations said. The economy

improved in the fourth quarter, the source noted, and the PBOC does not want

already-high inflation to spike higher during the Chinese New Year holidays.

     "The current priority is providing ample liquidity to offset the huge cash

demand during the festival rather than rate cuts," the source said, noting that

such moves were less effective during holidays anyway. "We might save our

ammunition and avoid sending a signal of excessive policy easing to markets."

     The PBOC left its 1-year and 5-year LPR - a benchmark key for setting

lending rates to companies -- unchanged for the second consecutive month at

4.15% and 4.8% on Jan. 20. Many analysts had predicted a 5-basis-point cut

following central bank liquidity injections during the month of CNY880 billion

via open market operations by Jan. 23 plus CNY800 billion via a cut in banks'

reserve requirement ratios.

     The additional liquidity does not seem to have been enough to counter the

seasonal liquidity crunch and push down money market rates, other sources said.

     Chinese financial market investors have begun to speculate that positive

developments in recent economic indicators, including investment, consumption

and PMI results, might lead the PBOC to alter its moderate easing bias.

     --COUNTER-CYCLICAL MONETARY POLICY

     But a second source close to policy makers said this was unlikely, noting

that December's Central Economic Working Conference, which sets the policy tone

for the year, had stressed strengthening economic headwinds. Monetary policy

will continue to be counter-cyclical, despite any slight economic improvement,

the source said.

     "Cuts in reserve requirement ratios and policy rates are still optional

tools when necessary, and open market operations could also increase, to guide

down the real loan rate," he said.

     The central bank has other tools to guide down the LPR, the two sources

said.

     "China is in a transitional period during which the central bank is trying

to enact its policies mainly through rate tools rather than quantitative ones,

so we have to make good use of both kinds of tools for the moment," the first

source said, noting that increasing base money and requiring banks to lend more

to companies would also help to lower the LPR.

     The PBOC and the China Banking and Insurance Regulatory Commission are

likely to further push banks to provide cheaper long-term loans to smaller

businesses, the source said, adding that PBOC moves will depend on market

sentiment and the performance of the economy.

     The CBIRC said at the end of 2019 that it wants loans to small business to

increase by CNY2 trillion in 2020, outpacing growth in other loans, and for

their funding costs to fall by 0.5 percentage point.

     A concern for authorities, according to both sources, is that China's

monetary policy transmission is inefficient, meaning that changes to money

market rates do not always feed through into real economy lending costs.

     Smaller banks' interbank activity is often limited, and collateral

requirements for corporate borrowers can be overly strict, the second source

said.

     "Even now, the proportion of companies able to get bank loans is pretty

low, as there are still many hidden rules regarding the size of the borrower's

business and fixed-asset collaterals. So lending rates don't reflect real loan

demand," he said, "Regulations should be further relaxed, because the economy

faces strong headwinds."

     Another reason the LPR remained unchanged this month was the reluctance of

the 18 banks providing monthly quotations used in formulating the rate to cite

lower rates, the source said, noting that their net interest margins would fall

without a corresponding reduction in the PBOC's deposit rate or in its

medium-term lending facility rate.

     The 34 banks listed as A-shares made net profits of CNY1.33 trillion in the

first three quarters of 2019, the source noted, 42% of the total net profit of

the 3,700 companies listed.

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

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