MNI: PBOC Rate Cut Expectations Build After Deposit Cuts

Greater-than-expected economic headwinds are putting pressure on the People’s Bank of China to ease policy, with its recent guidance for banks to lower interest on deposits indicating a likelihood of a cut to its medium-term lending facility rate as soon as next week, policy advisors and analysts told MNI.

A cut to the MLF and also to the seven-day repo rate would help stabilise growth, said Zhu He, senior fellow at China Finance 40 Forum, speaking after May export data added to disappointing performances by investment and consumption indicators.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said a sluggish property market also argued for the first MLF cut in nine months, outweighing concerns over liquidity traps and yuan weakness. An MLF cut would help to guide down the benchmark loan prime rate, particularly for terms of over five years, making mortgages cheaper and boosting house sales, he suggested.

In a recent note, Ming Ming, chief economist at CITIC Securities and a former PBOC official, predicted the one-year MLF could be cut 5-10bp next week. The need for the central bank to also reduce reserve requirement ratios to maintain growth in the second half of the year is rising, he said. (See MNI: China Faces H2 Headwinds As Consumption Weakens)

NET INTEREST MARGINS

Speculation of a PBOC cut built on Wednesday, when large state banks announced they would lower the interest they pay on demand and fixed-term deposit rates by between 5-15bp depending on tenor – the second deposit-rate cut since September. Guidance from the PBOC to cut deposit rates indicates it is concerned to protect lenders’ net interest margins, which have already fallen, shaving 6.1pp off banks’ Q1 net profits in year-on-year terms.

Interest margins are currently at levels which would complicate any moves to bolster their capital, said Dong, making further cuts to deposit rates likely, depending on the strength of any economic rebound. (See MNI: Slowing Economy, Credit Fears Weigh On China Bank Stocks).

Analysts at China International Capital Corporation calculated that this week’s deposit-rate reductions would contribute 3bp to net interest margins and save banks CNY120 billion.

The cuts could lead to cheaper loans, and send an easing signal, boosting confidence, said Zhang Yongjun, economist at the China Center for International Economic Exchange, though he noted that the PBOC will have to take into account uncertainty about yuan weakness and the future direction of Federal Reserve monetary policy. Policy transmission is also likely to be slower after the Covid-19 shock, so officials may need more time to evaluate effects of policy changes before making further moves, he continued.

Fiscal policy, though, is more effective, Zhang said, noting that authorities could sell more local government special bonds or special treasury bonds, which are not counted in narrow measures of the fiscal balance. China issued CNY1 trillion of special treasuries in 2020 in bid to defend the economy against the Covid shock, the fourth time it had raised such debt. (See MNI INTERVIEW: Weak China PMI Demand Needs Fiscal Support).