MNI PBOC WATCH: Major MLF Injection Lowers RRR Cut Possibility

China’s reference lending rate will likely remain unchanged in November as pressure on the yuan persists, while a recent significant net injection of medium-term lending facility (MLF) funds will lower the chance of a cut to the reserve requirement ratio, economists told MNI.

The loan prime rate (LPR), based on the rate on the People’s Bank of China’s MLF and quotes submitted by 18 banks, is expected to remain steady at 3.45% for the one-year maturity and 4.2% for the over-five-year maturity next Monday.

The PBOC kept the one-year MLF rate steady this week at 2.5%, but injected CNY600 billion of net MLF loans into the interbank market – the largest monthly net injection since December 2016.

The operation will limit room for an RRR cut this year, said Wen Bin, economist at China Minsheng Banking Corp. He attributed the unchanged MLF rate to the yuan's volatility.

Speculation of an RRR cut, which would support bond issuance, has grown as local governments executed refinancing bonds and the central government revealed plans to launch an additional CNY1 trillion of transactions starting mid-November. (See MNI: PBOC Eyes CNY1 Tln Liquidity Tool For Local Gov't Debt )

LIQUIDITY GAP

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, noted the MLF injection equates to a 25bp RRR cut, which will support liquidity siphoned off by government bond issuance and rising cash demand into year end.

However, economists agree the central bank will maintain an easing stance to ensure ample interbank market liquidity, which Wen noted had suffered since October and led to rapidly rising wholesale money-market rates. Negotiable certificate of deposit (NCD) one-year rates have increased to 2.57% this month from 2.22% in August – higher than the MLF rate – while the 7-day repo rate has remained above the policy rate over the same period, indicating a liquidity shortage, Wen noted.

TEPID RECOVERY

Recent economic indicators point to an unstable recovery weighed down by weak demand. Wang Qing, chief macroeconomic researcher at Golden Credit Rating, said falling manufacturing and services PMI in October indicated the recovery had slowed. Consumption remained soft and the property sector continued to struggle, which will require further central bank action to prevent money-market rates rising rapidly.

He predicted the PBOC would conduct a further significant injection of MLF in December and cut RRR by another 25bp if necessary before year’s end to reduce lenders’ funding costs.

Wen agreed the recovery had weakened. Easing would expand after the external environment improved, particularly as the U.S. Federal Reserve ends its rate hikes, he said.