MNI PBOC WATCH: LPR Steady As PBOC Warns Of Overly Low Rates

China's Loan Prime Rate will likely remain stable over the coming months following the central bank’s warning that excessively low interest rates could negatively impact competition, production capacity control and reduce inventory in some sectors.

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

The pause was in line with expectations, following the Bank’s decision to hold its one-year MLF rate steady last week at 2.5%. (See MNI PBOC WATCH: April LPR Likely To Hold Steady As Yuan Weakens)

NEUTRAL PBOC

Zou Lan, head of the monetary policy department at the PBOC, told reporters last Thursday the central bank will prevent overly low interest rates from worsening internal competition and idle capital, which could lead to further price reductions and a downward spiral.

He stressed higher interest rates in sectors where financial resources need tight allocation can push companies to control production capacity and reduce inventory, pointing to the experience of sectors closely related to the property market, such as ferrous metals.

The PBOC has also stressed in recent months that it could use reserve tools at the right time.

However, investors have grown increasingly concerned the central bank may switch to a neutral stance due to its repeated warning of the potential interest-rate risk among long-duration investments, the need to avoid idle and stagnant funds, and the danger of overly loose monetary policy that fails to improve economic structural reform. (See MNI: PBOC Wary Of Rapid Long-dated CGB Yield Decline)

Lenders have primarily directed credit toward leading enterprises and policy-supported sectors, resulting in a concentration of resources that puts downward pressure on prices due to persistently insufficient demand.

Zou said the regulator will strengthen idle fund monitoring as some bank lending has exceeded the effective needs of the real economy, while some companies have used low-cost loans to invest in wealth management products or re-loaned it to other companies. This ultimately reduced the efficiency of capital utilisation, he added.

AMPLE LIQUIDITY

Ample interbank-market liquidity, better-than-expected Q1 GDP, and the external environment means a policy rate cut in the near term remains an unlikely option.

Xuan Changneng, vice-governor at the PBOC, said in a briefing last month that policy shift among major economies would give the PBOC’s interest-rate operations greater flexibility.

However, doubts remain over the U.S. Federal Reserve’s desire to cut, while China’s strong 5.3% y/y GDP growth in Q1, higher than the annual target of “around 5%,” also decreased the urgency of rapid policy stimulus.

Low funding costs in the wholesale market, represented by one-year AAA-rated negotiable certificates of deposit, have also largely dropped thanks to the ample liquidity.