The People’s Bank of China is expected to cut policy rates and lower reserve requirement ratios further in the fourth quarter as it seeks to boost credit expansion by lowering banks’ funding costs, analysts said.
The Bank may ease policy by cutting the rate on its medium-term lending facility (MLF) and reverse repo rates again (See: MNI PBOC Cuts MLF, Reverse Repo Rates by 10bps Apiece), which combined with lower deposit rates, would lower the cost of funding for banks, said Industrial Securities analyst Huang Weiping. Banks lowered their deposit rates earlier this month.
He said lower borrowing costs of banks would quicken credit expansion, with the PBOC able to ensure ample liquidity by cutting banks’ reserve requirement ratios to offset maturing MLFs. A total of CNY3.3 trillion of MLFs – which provide funding to banks - will mature between September and January 2023, up from CNY1.95 trillion in the first eight months of the year.
Lower rates on reverse repos is an additional way to support banks. The PBOC restarted 14-day reverse repos on Sep 19 for the first time in eight months, with the injection of CNY10 billion maintaining stable liquidity at the end of the quarter.
More easing is likely as strong corporate lending supported by policy banks is viewed as unsustainable and as the weak property market saps demand for home loans, said Huachuang Securities chief analyst Zhang Yu. The PBOC may cut policy rates should industrial profits decline year-on-year given inflation remains well behaved and provides room to ease, Zhang added.
A weak yuan is fuelling concerns the PBOC may drain liquidity from the market, but weak exports and the slow recovery in domestic demand will see the PBOC tread cautiously, said Cai Hao, a researcher at the National Institution for Finance and Development. The Bank is aware of growing leverage and carry trades in the interbank market, he added. Cai will focus on September data for total social finance (TSF) and exports to get a better read on the timing of further easing.
WEAK CREDIT DEMAND
A reluctance by businesses and households to borrow, and instead save and deposit money, has been highlighted by growing gaps between key measures of the money supply like M2 and M1, as well as M2 and TSF.
In August, M2 growth surged to 12.2% - the highest since April 2016 – and M1 slowed to 6.1%. Outstanding TSF grew 10.5%, down from 10.7% in June.
The 1.7 percentage point gap between M2 and TSF was the largest since November 2015, and it was the first time M2 growth was higher than TSF growth since March 2016.
The growing gaps between money supply measures reflect ample liquidity stuck in the interbank market as credit demand remains weak and deposits grow, said Everbright Securities analyst Wang Yifeng. He said the banking sector’s loan/deposits ratio dropped to 95.6% in the first eight months of the year, down from 190.1% in the same period last year.
Corporate deposits rose CNY955.1 billion and household deposits increased CNY828.6 billion in August. Corporate and household deposits have averaged CNY629.7 billion and CNY334.2 billion respectively in August over the past three years, according to PBOC data.
The economy requires higher government leverage, funded by bond issuance, to help boost credit demand, said China International Capital Corporation analysts. However, if the government maintains the current debt/GDP ratio, then the expansion of TSF will slow, placing more pressure on monetary easing to bolster growth.
The PBOC has been urged to act quickly to avoid the possibility of a liquidity trap. Wang Yongli, former deputy governor of the Bank of China, suggested the PBOC should enhance its targeted tools to support the transmission of stimulus policies.
