MNI PBOC WATCH: LPR Rate Seen Held Steady

The People’s Bank of China will likely hold its reference lending rate unchanged on Thursday to support the economic recovery and boost credit expansion among lenders battling narrow net-interest margins, economists and analysts told MNI.

The one-year LPR has been left at 3.65% and the five-year plus maturity at 4.3% since August 2022. The PBOC bases the rates on its Medium-term Lending Facility (MLF) and quotes submitted by 18 banks. The Bank stated last Friday it wants to “maintain reasonable credit growth at a stable pace” making a more dovish policy stance unlikely in recent months.

The Bank has kept the MLF steady over the last eight months, making an LPR cut unlikely, according to Dong Ximiao, chief researcher at Merchants Union Consumer Finance. While PBOC data showed strong credit demand in Q1, the accelerated expansion was partially due to targeted relending tools that supported infrastructure and regulators’ efforts to increase loan supply, Dong added.

Further cuts to policy rates are still needed to stabilise credit growth and boost household demand, he noted. However, analysts predicted the central bank will likely not touch the policy rates in H1 as its recent statements have signaled a clear optimistic judgement on the economic outlook.

GDP GROWTH

According to National Bureau of Statistics, China GDP grew by 4.5% in Q1, compared to the expected 3.8% and 2.9% from Q4, with industrial production and retail sales driving the trend (see: MNI BRIEF: China GDP Up 4.5% Y/Y In Q1).

Zhu Qibing, chief macro analyst of BOC International China, said monetary policy has shifted to fine tuning targets from the previous bias of strengthening enforcement. The last MPC meeting noted “[The] domestic economy has showed a recovering and good momentum” compared to Q4 2022’s statement that the economy suffered from contracting demand, supply shocks and weakened expectations.

In addition, Zhu estimated the PBOC would continue to target carbon emissions and key sectors, noting the liquidity that targeted facilities have injected was about the same as reserve requirement ratio cuts. The PBOC unlocked about CNY1.03 trillion via two RRR cuts in 2022, while the outstanding volume of targeted tools simultaneously added CNY1.17 trillion.

Zhang Yu, chief analyst at Huachuang Securities, said the central bank will provide cheap funds to specific sectors via targeted tools, while keeping policy rates stable.

MARGINS SQUEEZED

The LPR will not change without an MLF rate cut and this is unlikely while bank margins are squeezed – both net-profit and net-interest margin have recorded lower than pre-pandemic levels recently, analysts said.

According to annual reports of A-share listed banks, average net-profits of large state-owned institutions dropped to 6.8% between 2020-2022 compared to 10.8% in 2019, while city commercial banks printed at 0.6%, compared to 2% in 2019. The net-interest margin narrowed to a record 1.91% last year as regulators actively guided the loan rate down.

In addition, surging deposits – particularly among fixed-term accounts – have further pressured lenders. Fixed-term deposits with an average 3% interest rate rose a total of CNY18.7 trillion in 2022, compared to the CNY4 trillion of legacy deposits carrying a 0.4% average interest rate.

Several small banks revealed plans in April to reduce the interest rate on their deposits to counter higher funding costs, following similar moves of the big banks last year.