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MNI PBOC WATCH: Q3 Economic Rebound Lowers Rate Cut Chance

MNI (Singapore)

China’s reference lending rate will likely remain unchanged in October, after Q3’s strong-than-expected economic performance and as the yuan passes through a period of weakness, economists told MNI.

The loan prime rate (LPR), based on the rate on the People’s Bank of China’s medium-term lending facility (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 on Friday.

Economic indicators were positive in September, while credit data also improved. Fiscal and property policies also continue to filter into the economy, said China Minsheng Banking Corp Chief Economist Wen Bin, adding that authorities may prefer to observe the impact of previous stimulus this time round. The yuan is still under pressure, which will restrict policy easing, Bin noted.


According to the National Bureau of Statistics, China GDP expanded 4.9%y/y in Q3, beating the 4.5% y/y expectation thanks to robust consumption and resulting in a 1.3% q/q rise. (See MNI INTERVIEW: China GDP To Beat Expectations- Ex PBOC's Sheng) The central bank kept its one-year medium-term lending facility rate steady on Monday at 2.5%, but pumped about CNY289 billion of MLF into the interbank market, the largest monthly net injection in 33 months.

Improved credit demand and increased issuance of local-government debt have drained liquidity since September, reflected in rising money market rates, economists said.

The seven-day repo rate for deposit-taking institutions remained at about 1.9% last week, 10bp higher than the PBOC’s policy seven-day repo rate. Negotiable certificates of deposit rates issued by major banks – a typical interbank market liquidity product – also rose to 2.5% simultaneously with the MLF rate, indicating deteriorating liquidity.

However, Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co Ltd, told MNI the PBOC would lower LPR further at a moderate pace by 5-10bp to consolidate the growth of corporate and household loans and boost confidence and credit demand.

PBOC governor Pan Gongsheng during a speech last week at an IMF meeting set a positive tone, noting the central bank would use both broad and targeted tools to provide support for the economy.

Dong said it indicated the PBOC wanted to use monetary policy in a precise manner. He suggested the Bank should improve its 17 structural policy tools and introduce new mechanisms when necessary to help small and micro-businesses, technological innovation and green development.


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