MNI: PBOC Seen Cutting Deposit Cost As It Pushes Banks To Lend

The People’s Bank of China is likely to push banks to reduce loan rates and support the property sector while keeping a lid on the cost of deposits as it loosens policy in support of the government’s target for growth of about 5.5% this year, current and former PBOC officials told MNI in interviews on the sidelines of the National People’s Congress.

“Remaining credit stability” will be “significantly meaningful” to support the government target, said Xu Nuojin, former head of PBOC’s Zhengzhou branch and an NPC deputy, calling for measures including cuts in banks’ reserve requirement ratios (RRRs), the loan prime rate and relending rates for agriculture and small business. The PBOC will also provide targeted tools aimed at key sectors, he said.

The central bank will guide lenders to boost long-term loans to manufacturing, small businesses, tech and green finance, said Xu, now head of Zhongyuan Bank. Property lending should increase after some cities loosened restrictions and accelerated government-subsidised housing projects, he added.

Rules on property loans had been tightened last year amid bubble concerns.

FLEXIBILITY

But monetary policy must be flexible and strike a balance between preventing credit contraction and avoiding excess money supply, said Zhou Zhenhai, former head of the PBOC’s Tianjin branch and an NPC deputy.

The central bank will also regulate competition in the deposit market, to keep banks’ funding costs down, as well as ensure lenders have access to ample liquidity and capital, he said.

According to the PBOC’s quarterly monetary policy report, the rate on new time deposits averaged 2.21% last September, down 0.17 percentage point, after the central bank modified ceiling calculations in June, lowering lenders' funding costs.

Deposit growth has been slow, but there is still room to cut RRRs to enable them to lend more, said Xu, pointing to downside risks to an already weak economy from rising commodity prices and geopolitical conflict.

YUAN MANAGEMENT

A strong yuan, supported by China’s relative economic strength and safe-haven flows, provides additional space for PBOC easing, Xu said.

While Premier Li Keqiang reiterated in his work report on March 5 that the yuan will be kept “generally stable at an adaptive and balanced level,” PBOC officials noted that the authorities would continue to take a flexible approach to changes in the exchange rate.

The PBOC will stabilise market expectations and push financial institutions to help small companies hedge foreign exchange risk while monitoring cross-border capital flows, said Guo Xinming, head of the PBOC’s Nanjing branch.

A flexible foreign exchange policy and management on cross-border capital flow will enable the country to cushion external risks, including from monetary tightening by major Western central banks, Guo said.

The PBOC retains room for policy manoeuvre even as international conditions tighten, given that it eased only moderately after the outbreak of the Covid pandemic, the yuan exchange rate remains stable and the financial sector has been resilient, Guo noted.