MNI: PBOC Eyes Lower Rate For GDP Target, RRR Cut Optional

The People’s Bank of China will likely cut its policy rate further to guide down the reference lending rate by 10-20 basis points over the remainder of 2024 following Q2’s poor GDP growth, policy advisors and economists told MNI, adding deposit rate reductions and possible U.S. Federal Reserve easing will aid the central bank’s task ahead.

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University of China, noted Beijing’s goal was still aimed at boosting investment and consumption by lowering financing costs and allocating more financial resources to the real economy in H2, which will support further rate cuts.

Lenders’ interest margin has reached record lows, which has restrained the central bank’s easing capability, but the latest round of deposit interest-rate reductions would give the PBOC room to make cuts, Zhao noted. However, the lack of profitable projects and poor confidence over residential income may temper the effectiveness of any easing to stimulate investment and consumption, he argued.

China state-owned banks last week lowered deposit interest rates by 5-20bp depending on maturities. Some commercial banks have also started to follow.

Zhao noted the deposit rate cuts – medium and long-term maturities fell as much as 20bp – will make further Loan Prime Rate reductions more likely, following last week’s 10bp adjustment.

The PBOC last week unexpectedly cut the 7-day reverse repo rate by 10bp, and simultaneously guided down the LPR by 10bps. (See MNI PBOC WATCH: PBOC Cuts 7-Day Rate As Reconfigures Framework)

GDP KEY

The politburo meeting on Tuesday called the PBOC to use its various monetary-policy tools to increase financial support and “promote a steady decline in overall social financing costs.” The comments were driven by Q2's disappointing 4.7% y/y GDP print, which resulted in 5% y/y GDP growth in H1. The result will make it harder for the economy to meet the government's full-year 5% growth target.

Lian Ping, chairman at the China Chief Economist Forum, noted a possible September rate cut by the Fed would help the PBOC ease further and drive LPR 10-20bp lower. The Bank would then continue to decrease rates over the next three-to-five years, Lian predicted.

However, the small 10bp cut showed the central bank remained cautious over rate reductions as the China-U.S. interest spread maintained pressure on the yuan and capital flow, Lian added.

An advisor familiar with monetary operations told MNI the hesitant policy stance would be less effective to boost the economy and shake off deflationary pressure compared with rapid and larger rate cuts. The PBOC's actions to date had not achieved the desired results, he added.

RRR CUT

The PBOC also unexpectedly decreased the one-year Medium-term Lending Facility rate by 20bp last Thursday, the largest reduction since April 2020, and provided CNY200 billion of MLF – the biggest net injection since January. (See MNI INTERVIEW 2: China Fiscal Expansion Crucial, RRR Cut Eyed)

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said the PBOC likely cut RRR according to the needs of the economic recovery. The sequence of the rate cuts and the off-schedule MLF operations may also deliver a signal for further easing, he noted.

The MLF injection showed the PBOC wanted to maintain ample liquidity to smooth potential increased demand at month’s end, he added. The lower rate would also help make MLF more attractive by narrowing the rate gap between it and negotiable certificates of deposit, he argued.