MNI PBOC WATCH: LPR To Hold As CGB Liquidity Pressures Lenders

China’s reference lending rate will likely remain unchanged in December as elevated wholesale money market rates increase bank financing costs, while strong government debt issuance drains liquidity from the interbank market, analysts and economists told MNI.

The loan prime rate (LPR), based on the People’s Bank of China’s medium-term lending facility (MLF) rate and quotes submitted by 18 banks, will likely hold steady at 3.45% for the one-year maturity and 4.2% for the over-five-year tenor on Wednesday. The one-year rate has not changed since Aug 21, while the five-year maturity has held since June 20.

Liang Jing, senior analyst at the Bank of China Research Institute, noted the central bank kept the MLF steady last week at 2.5%, while lenders continued to suffer from higher costs due to increased government bond issuance and strong credit supply. Both issues would drive the LPR decision, Liang said.

Authorities have accelerated the issuance of CNY1 trillion in additional treasures since October, with a net CNY1.15 trillion in debt printed in November, up CNY499 billion over the same period in 2022. The issuance has pressured market liquidity, with one-year AAA negotiable certificates of deposit – an important wholesale bank funding tool – trading higher than the one-year MLF at 2.61% in mid-December.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, said a steady LPR will help stabilise lenders’ interest-rate margin as corporate- and consumer-loan rates had already fallen.

MARGIN SQUEEZE

According to the Bank of China Research Institute, Chinese commercial banks’ net interest margin dropped to 1.73% by the end of September, down 0.21 percentage points y/y. The institute expects it to fall further as financial regulators push for lower funding costs in the real economy.

China Minsheng Banking Corp Chief Economist Wen Bin said a policy-rate reduction could trigger corporate-loan arbitrage, encouraging some companies to borrow at the lower rate and stash the proceeds into higher returning deposits and wealth management products, making a cut less effective. The bank’s desire to improve efficiency and stabilise the yuan will also add to its reluctance to reduce policy rates, Wen noted. (See MNI: China To Pursue Moderate Policy Support In 2024)

An appropriate interest margin will ensure lenders have the capacity to reduce property-sector and local-government debt risks, he added. The central bank will also choose to enhance the open market operations and MLF injection over cutting the reserve requirement ratio to smooth liquidity.

While the PBOC kept the one-year MLF unchanged last Friday, it net injected as much as CNY800 billion – its largest this year – into the interbank market.

Liang said the central bank will continue with large liquidity injections as tax payments and cash demand pressure money markets before China’s Spring Festival in February, alongside the continued government debt issuance. An RRR cut in the near term could still occur, while a policy-rate cut next year remained possible as the economic recovery will need to consolidate, Liang predicted.

Dong said the PBOC will increase its reverse repo operations to maintain ample liquidity conditions, while an overall or targeted RRR reduction will help it deal with low liquidity before the Chinese new year.