MNI: PBOC Seen Easing MLF, Repo Rates Later In 2024

The People’s Bank of China will likely cut rates for policy tools such as its medium-term lending facilities and 7-day repo by around mid-year, but weak credit demand will divert liquidity released by easing moves – such as last week's reserve requirement ratio cut – to unproductive financial arbitrage, policy advisors and economists told MNI.

Easing policy rates later this year will boost market sentiment as low inflation pushes up real funding costs and easier U.S. monetary policy tends to strengthen the yuan against the dollar, said Wu Chaoming, deputy director of the Chasing International Economic Institute. The reserve requirement cuts and rate reductions since the second half of 2021 have still not boosted lending sufficiently, he added. (See MNI INTERVIEW2: CNY Strengthens, Third Plenum To Detail Reform)

The 50-basis-point reserve requirement cut announced unexpectedly by PBOC governor Pan Gongsheng last Wednesday, the biggest since December 2021, will release CNY1 trillion in long-term liquidity, but monetary easing faces a challenge from insufficient credit demand as China seeks to establish new economic drivers, Wu said.

The PBOC also cut targeted relending rates for the agricultural sector and small business by 25bp, after authorities became concerned by a share-market selloff.

While authorities may find other easing measures appropriate, limited room may exist for further cuts to reserve requirements, following a 760bp reduction since 2018 to an average 7%, Wu said.

There are also signs liquidity from easing so far has fueled financial arbitrage. The daily volume of overnight repos topped CNY8 trillion in July, more than double levels before 2021, according to data provider Choice. Some 90% of total repo trades were overnight in August, back to levels not seen since authorities launched a deleveraging campaign in 2015 and 2016.

The Standing Committee of the National People's Congress, China's top legislator, said in November that a wide gap between M2 and M1 money supply measures showed financial sector arbitrage was diverting funds from small- and medium-sized companies.

Big companies can use repos to borrow at 2-4%, then get 50-150bp more from small bank deposits or wealth management products, one bank manager told MNI. M1 was equivalent to only 23.3% of M2 in December, compared to 87% in the U.S. and 97% in India, PBOC data shows, indicating the extent of funding circulating within the financial system.

The disproportionate growth of M2 compared to M1 reflects companies’ limited appetite for investment, which is a problem beyond the central bank’s remit, noted Zhang Wei, vice-chair of the Tsinghua University National Institute of Financial Research and a former PBOC official.

Any easing will bear in mind the PBOC’s objectives for inflation and a stable exchange rate, as well as concerns over commercial banks already-squeezed net interest margins, he added. The priority now for the central bank, however, is ensuring economic growth, he continued.

But a new central bank department, whose creation was announced by Pan, aiming to channel funds to needy sectors while restricting lending to economic sectors responsible for oversupply will improve the efficiency of targeted tools and help provide room for additional monetary easing by mid-year, a policy advisor said. (See MNI INTERVIEW: PBOC To Boost Targeted Facilities - Advisor)

Last week’s reserve requirement cut followed calls on two consecutive days by Premier Li Qiang for efforts to boost sentiment after a steep selloff saw the Shanghai Composite Index hit its lowest point since March 2019.

The last easing moves announced by PBOC Governor Pan on Wednesday prompted an equity market rally, with both A shares and the Hang Seng Index jumping on Thursday. But share market may find sustaining the price recovery difficult without further measures, the advisor told MNI, adding equity performance relies on higher profits of listed companies which in turn depend on what remains a weak economy.

The PBOC’s moves last week will likely prompt lenders to lower quotes for the benchmark Loan Prime Rate by 5-10bp by as early as February, but cuts to PBOC policy rates including those for the medium-term lending facility and 7-day repo, could come around the middle of the year, once authorities have had time to further assess the economy and the progress of U.S. monetary policy, he said.