MNI PBOC WATCH: April LPR Likely To Hold Steady As Yuan Weakens

China’s reference lending rate will likely remain unchanged in April following the central bank’s decision to hold its policy rate steady as U.S. dollar strength weighs on the yuan and solid Q1 GDP growth reduces the need for monetary easing in the short term.

The Loan Prime Rate, based on the People’s Bank of China’s medium-term lending facility (MLF) rate and quotes submitted by 20 banks, will likely hold at 3.45% for the one-year maturity and 3.95% for the over five-year tenor on Monday.

The PBOC kept the one-year MLF rate unchanged at 2.5% on April 15, draining a net CNY70 billion of liquidity from the inter-bank market, its second consecutive monthly withdrawal. The hold was largely expected due to the yuan’s weakness, driven by significant U.S. dollar strengthen stemming from the Federal Reserve's potential interest-rate cut delay.

Zhu Hexin, vice governor of the PBOC, told reporters on Thursday that the central bank will closely monitor the yuan and guard against any overshooting risks, implementing measures to stabilise market sentiment and resolutely correct any pro-cyclical behaviour. (See MNI: More Yuan Volatility Ahead, PBOC Vigilant)

WEAK YUAN

The PBOC continues to shore up the yuan via a stronger-than-expected fix and tighter offshore yuan (CNH) liquidity.

The significant pressure on the yuan will restrain the PBOC’s rate-cut pace. The central bank has repeatedly stated policy must maintain an “internal and external balance,” meaning it will seek to weigh monetary-policy easing with U.S. rate pressure on the currency.

The interest spread between 10-year Chinese government bonds and U.S treasuries widened to as much as 230 basis points last week, while the A-shares market lost CNY11.4 billion, its largest weekly outflow since January.

However, Zhu noted solid Q1 economic performance, which improved in multiple areas, will offset external issues and provide the yuan support over the short term. (See MNI INTERVIEW 2: China Needs Strong Yuan To Support Imports)

SOLID Q1 PERFORMANCE

China’s Q1 GDP grew by 5.3% y/y, beating the 4.6% expectation, thanks to strong industry output and despite March's weakness, according to the Nation Bureau of Statistics.

Sluggish consumption and the soft property market last month illustrated issues over insufficient demand, while strong PMI indicated a marginal improvement to business sentiment.

The PBOC has noted the economic recovery and its sustainability will dictate future policy and has reiterated in recent statements that it will curb idle funds circulating inside the financial system.

As a result, the Bank has restrained liquidity injections via open market operations. The PBOC at April 19 had drained a net of CNY842 billion from the interbank market this month, maintaining the 7-day repo market rate above the 1.8% policy rate of the same tenor.