MNI PBOC WATCH: China’s LPR Seen Steady On Economic Recovery

China’s loan prime rate is expected to remain unchanged this month as credit continues to expand amid a robust economic rebound, though the key reference rates could be lowered if the recovery falters, economists and advisers said.

The loan prime rate (LPR) for the 1-year and over-5-year tenors are expected to be maintained at 3.65% and 4.3%, respectively, on Monday, as the quotes provided by a panel of banks will be unchanged and the People’s Bank of China kept the rate steady on its medium-term lending facility on February 15.

There is less need for a lower LPR as the property market has showed signs of bottoming and January credit data highlighted unexpectedly strong demand for funding, said Zhang Jingjing, analyst at China Merchants Securities. She also noted the PBOC’s targeted tools, most of which carry a rate of 1.75% compared to 2.75% on the MLF, had worked as a “targeted rate cut” to boost credit.

However, there could be a cut in the over-five-year LPR if the economic recovery lost momentum or the property sector weakened, she predicted. (See MNI INTERVIEW: China Should Grow 5% But Property A Drag - Hofman)

The PBOC left the MLF rate steady last Wednesday, fuelling speculation of an unchanged LPR. The Bank injected a net CNY199 billion via a one-year MLF, the third consecutive month of net injection, with the rate unchanged at 2.75% for a seventh month.

China Minsheng Banking Corp chief economist Wen Bin agreed a cut in the policy rate was not necessary now because mortgage interest rates for first house buyers had been lowered in many cities, helping rekindle interest in the property market. He added that lenders had accelerated credit supply at the beginning of the year and attracted qualified clients via reduced loan rates.

For qualified companies, particularly for companies owned by the central government, loan interest rates are expected to be much lower than the LPR, Wen said, noting a rate cut now would further squeeze the net interest margins of lenders.

EASING STANCE

Even though there is a low chance of a policy rate cut, the PBOC will maintain an easing stance and may cut the reserve requirement ratio in April and October to free up long-term funds for lenders and to help consolidate the credit expansion, he estimated.

According to the PBOC, new yuan loans surged to a record monthly high of CNY4.9 trillion in January. This siphoned liquidity from the interbank market and increased the need for lenders to set aside more capital to satisfy reserve requirements. This is one of the reason why the interbank market has suffered a liquidity shortage, prompting the PBOC to increase the MLF and its liquidity injections via open market operations.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, warned about being overly optimistic about the economic recovery, noting household sector credit demand continued to shrink last month. Household loans fell by CNY586 billion year-on-year in January, indicating that household sector confidence in the outlook for consumption and investment is still soft. (See MNI: China's Rebound At Risk From Balance Sheet Recession)

He called for the PBOC to cut its policy rates and guide down the LPR, particularly the over-five-year rate, to boost confidence.

CITIC securities chief economist Ming Ming said more easing could be expected should indicators show strong company credit growth but weak household sector growth, or if government loans continue to outpace private sector loans.