MNI PBOC Watch: LPR To Hold, Idle Funds Targeted

China’s reference lending rate will likely remain unchanged in March as the central bank focuses on pushing lenders to implement previous easing measures via lower real loan rates and channelling ample liquidity through the economy.

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

The PBOC kept the one-year MLF rate unchanged at 2.5% last Friday, a typical sign the LPR will likely hold. The unexpected 25 basis point reduction to the five-year plus LPR last month guided down loan rates, adding further pressure on lenders’ interest margins, and narrowing the chance for an additional LPR reduction in March. (See MNI PBOC WATCH: LPR Cuts Possible Despite Steady MLF) The one-year LPR has held at 3.45% since last August.

IDLE FUNDS

China’s Premier Li Qiang noted in his government work report during the Two Sessions meeting this month that monetary policy should prevent funds from sitting idle “or simply circulating within the financial sector,” which aroused investor concern over a change to ample liquidity conditions. (See MNI: China Feb PMI To Remain Contractionary, More Rate Cut Seen)

The PBOC’s decision to conduct only CNY3 billion of 7-day repo over March 13 and 14 – the Bank’s first open market operation below CNY10 billion since August – alongside its first net drain of one-year MLF since December at CNY94 billion on March 15 added to concerns.

Fiscal, resident, and non-financial company time deposits have locked away a significant amount of liquidity over the last 12 months, according to Huachuang Securities, with about CNY20 trillion, or 64% of total social financing, added to deposits in 2023 compared to an average of 32% between 2013-2021.

Liquidity in the interbank market has remained loose thanks to the PBOC’s 50bp reserve requirement ratio cut on Feb 5, which unlocked CNY1 trillion, and the CNY500 billion injection of Pledged Supplementary Lending since December. The liquidity has led to around CNY700 billion a day in repo transactions so far this month, compared to the CNY500 billion average in the same period last year, and lowered money rates across the wholesale market.

The average rate of AAA-rated one-year Negotiable Certificate of Deposits dropped to 2.25%, compared to the one-year MLF’s 2.5%, making the latter less attractive than interbank products.

SIMILAR STANCE

The PBOC-controlled Financial News outlet explained lower demand from financial institutions had resulted in total MLF operations falling below maturities, which had lead to the drain on the facility. The Bank has not changed its stance of maintaining ample liquidity at a reasonable level, the paper noted.

The latest money supply data for the first two months in 2024 issued by the PBOC showed total social financing, M2 as well as M1 all pointed to weak credit demand and poor capital activity, meaning the PBOC lacks conditions to tighten its bias, and making easing efforts more likely.

PBOC Governor Pan Gongsheng said in a recent press conference during the two sessions that the Bank will make good use of various tools, strengthen counter-cyclical efforts and maintain ample liquidity in 2024.