MNI PBOC WATCH: May LPR To Remain Steady As Market Rates Fall
The LPR will remain on hold while the PBOC focuses CGB yield declines and its crusade against idle funds.
China’s reference lending rate is likely to remain unchanged in May as the central bank aims to steady the policy environment following the fall in market rates and as it pursues its mission to curb idle funds inside the financial system.
The Loan Prime Rate, based on 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 maturity on Monday. The rate last changed in February when the five-year plus maturity was reduced 25 basis points, while one-year tenor held steady. (See MNI PBOC WATCH: LPR Steady As PBOC Warns Of Overly Low Rates)
The PBOC kept the one-year MLF unchanged at 2.5% on May 15 and injected CNY125 billion to offset maturities, the first flat injection after two consecutive monthly drains. The decision was largely expected due to the continued narrowing of commercial bank’s interest margin and the risk of yuan depreciation.
The PBOC has also carried over its cautious liquidity injection stance from the prior month, draining CNY438 billion from the interbank market so far this month and providing only CNY2 billion 7-day repo operations each trading day following a net drain of CNY988 billion in April.
MARKET RATES
Key market rates have declined this year below the MLF rate driven largely by the accommodative policy stance, slow government bond issuance pace and the weak economic outlook.
The 10-year CGB yield dropped to 2.22%, a two-decade low, while the 30-year fell to 2.41% by mid-April. Meanwhile, the average interest rate of one-year AAA-rated negotiable certificates of deposit declined to 2.11%. (See MNI: PBOC Wary Of Rapid Long-dated CGB Yield Decline)
PBOC officials have warned the excessively low CGB rates are not in line with an upward economic growth trend, contributing the decline to a shortage of qualified assets due to slower CGB issuance this year. In addition, interest rates of new corporate and mortgage loans have dropped to a record low at present.
Moreover, the weighted-average net interest margin of listed commercial banks dropped to 1.57% in Q1, down a further 13bp from the same period last year.
IDLE FUNDS
The PBOC will continue its focus on curbing idle funds and activating financial resources as money supply has outpaced credit appetite driven by weak borrowing demand.
Its moves have been reflected in April's credit data. According to the Bank, new deposits decreased by CNY3.5 trillion y/y, and new loans under the total social financing metric declined by CNY112.5 billion thanks to measures such as cracking down on illegally offerings of high deposit rates, which in turn led to a corresponding decrease in deposit-derived loans.
In April, additional total social financing decreased for the first time since the indicator was introduced in 2011. New social financing declined by CNY198.7 billion yuan, while M2 grew by 7.2% y/y, which was lower than the expected 8.3% and also lower than the previous value of 8.3%.