MNI PBOC WATCH: LPR On Hold, But Ample Tools To Boost Growth

China's reference lending rates are expected to remain unchanged in January as confidence about an economic recovery grows after the easing of Covid controls, and as measures to expand credit and shore up the property sector gain traction, advisors and analysts 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 Friday as the quote provided by a panel of banks is likely to remain the same and the People’s Bank of China did not alter the rate on its medium-term lending facility (MLF) on Monday.

The need for a rate cut has been reduced as market sentiment is rebounding after strict Covid controls were lifted in December, and as recent policies together with previous measures to boost the economy take effect, said Sun Binbin, chief analyst of Tianfeng Securities. The PBOC is likely to maintain ample liquidity and save its policy ammunition, while structural tools such as targeted lending would be more effective than cuts to policy rates, he said.

The PBOC injected an extra CNY79 billion liquidity via the one-year MLF on Monday with the rate unchanged at 2.75%, the second consecutive monthly net injection. Additional liquidity has been provided via open market operations to satisfy rising cash demand before Chinese New Year and to bridge a liquidity shortage due to business tax payments and banks’ deposit reserve handover in the middle of the month.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said the LPR was likely to be kept steady this month as the MLF rate remained unchanged, which feeds into LPR pricing. The unchanged MLF rate was attributed to lower borrowing costs for lenders after they reduced their deposit rates recently.

However, Dong said there was a chance that the central bank may cut rates, specifically guiding down the over-five-year LPR to boost consumption and house buying. (See MNI INTERVIEW: China Should Grow 5% But Property A Drag - Hofman)

CREDIT DEMAND

Recent indicators showed credit demand is warming up after the reopening of the economy, which makes rate cuts less urgent. Medium and long-term corporate loans edged up in December, even though total social financing was below expectations. The accelerated roll-out of new infrastructure projects and the relaxation of property developer fund-raising regulations will also boost credit, advisors and analysts said.

Golden Credit Rating chief macroeconomic researcher Wang Qing predicted new loans would jump to as much as CNY4 trillion in January with the help of additional liquidity injections and the cut to the reserve requirement ratio (RRR) in December, which will boost market confidence and stabilise the economy. (See MNI BRIEF: PBOC Cuts RRR By 25bp As Covid Clouds Recovery)

The PBOC needs to assess the performance of credit and consumption before deciding the extent of its next stimulus moves, they said, noting recent economic indicators had pointed to a faster-than-expected recovery.

The economic recovery, particularly in consumption, recorded a strong rebound in December, according to the National Bureau of Statistics. Improved conditions in the property sector and strengthened investment in infrastructure also reduces the need for a big easing. (See MNI: Growing Chinese Savings Seen Hard To Boost Consumption)

China Minsheng Banking Corp chief economist Wen Bin said the economy has probably reached the bottom as Covid cases peaked, offline consumption is increasing, and turnover in the property market had slowed the decline in transactions. He said the PBOC will continue to expand the money supply and total social financing in line with the growth of nominal GDP and choose to cut rates and RRR at an appropriate time in the first quarter. (See MNI: PBOC To Cut Borrowing Costs, Support Liquidity In Q1)