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MNI: PBOC Needs To Cut Rates To Support Economy-Advisors

MNI (Singapore)
BEIJING (MNI)

A cut to China’s key policy rates is needed to boost the economy as an “unexpectedly fast” slowdown has concerned top policymakers, particularly with credit demand restrained by curbs on the property market and local government debt, advisors told MNI, adding that action was possible in early 2022.

Few obstacles stand in the way of the People’s Bank of China cutting one or more policy rate, including the medium-term lending facility (MLF) and the benchmark loan prime rate (LPR), said an advisor familiar with monetary policy operations. Factory-gate inflation has peaked and cracking down on property bubbles has already been effective in damping excesses, the advisor said.

The PBOC could move as early as next month to intensify the impact of policy rate cuts as banks and companies usually reprice lending costs at the beginning of a new year, the advisor said. (see: MNI: Tepid M1 Growth Tilts PBOC Easing Views-Advisors.)

“As credit risks for the whole of society are looming, the last option for the central bank is tightening its policy," the advisor said, noting that cutting rates would be more direct and effective than a further reduction in banks' reserve requirement ratios..

The advisor said authorities will be keen for an “appropriate economic environment” to accompany next year’s 20th National Congress, a key Party leadership meeting held every five years slated for the second half of 2022.

Adding some urgency to calls for lower policy rates, top property developer Evergrande Group was placed in selective default by Fitch ratings agency on offshore loans. Evergrande's problems will be addressed through market and legal channels, with due respect for the rights of creditors and shareholders, PBOC Governor Yi Gang said.

FACTORS

Dong Ximiao, a research fellow at the National Institution for Finance and Development, said there is a need for an MLF rate cut to further push down the LPR. He said the LPR reduction could happen on Dec. 15.

The PBOC said the CNY1.2 trillion in funds released by the surprise RRR cut on Monday will partly be used to repay CNY950 billion in maturing MLF this month, meaning only CNY250 billion would be injected into the interbank market. The central bank said its prudent policy stance has not changed.

Dong said the central bank chose to reduce RRR to ease concerns in capital markets, after GDP growth dropped below 5% in Q3 coupled with the growing property credit risks.

“The full RRR cut sent a clear signal that the PBOC is determined to keep liquidity ample since economic stability is set to be the prioritised task for macro policy, ” he said.

Dong expects the PBOC would work to channel the funds unlocked by the RRR cut to weak sectors in the economy such as small businesses, fledgling green initiatives and into new high-tech projects in manufacturing.

Zhao Qingming, deputy director of the China Forex Investment Research Institute, also called for a rate cut to bolster investment and consumption, as well as lowering interest payments for home buyers.

China lenders have made loans of CNY69 trillion to the household sector by the end of October, according to financial data provider Wind. Zhao said the annual interest payments are about CNY3.5 trillion, and a cut would lead to increased personal spending.

The monetary advisor predicted GDP would grow between 5%-5.5% next year and the yield of the10-year CGB would dip to 2.5% from the current 2.8%.

Zong Liang, chief researcher of Bank of China, said the bottom line for GDP growth next year would be 5%, predicting about 5.3%. If economic growth falls below 5%, the central bank would react with more easing policies, Zong said.

OTHER CONCERNS

However, there is a concern further monetary easing could fail to boost credit demand and stimulate the economy.

“The old credit engines—property, local governments and state-owned companies— are all under regulations, and small business now is struggling to survive, then who will expand credit,” the monetary advisor said, adding that could prompt more policy moves to prevent a sharp drop in house prices.

House sales figures in the coming months are an important barometer. He said there could be some concern expanded credit is invested in the stock market over property.

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