MNI PBOC WATCH: Targeted Easing To Boost Credit, RRR Cut Seen

The People’s Bank of China is expected boost credit growth by cutting the reserve requirement ratio and guiding down reference lending rates before the end of the year, though the use of targeted tools has limited the prospect of across-the-board easing, economists and policy advisers said.

Advisors and economists are divided on whether the over-5-year loan prime rate – which is used to price mortgages and long-term loans - will be lowered on November 21 or next month, after a partial rollover earlier this week of a maturing medium-term lending facility with an unchanged rate, which feeds into the pricing of the LPR.

There was some disappointment that the MLF operation was not accompanied by a cut in the RRR, which would have freed up bank capital, but the PBOC said an additional CNY320 billion of liquidity provided this month through pledged supplemental lending and relending tools, together with the CNY850 billion MLF rollover, exceeded the maturing CNY1 trillion MLF this month.

An advisor familiar with policy making, and who requested anonymity, attributed the lack of an RRR cut to the short time since the 20th Party Congress in late October and an ongoing reshuffle of heads of key departments. Clearer policy signs would emerge after the annual Central Economic Work Conference next month, he said, adding the structural tools may be relied on more to help smooth credit demand. (See MNI POLICY: China's New Leaders Face Challenges In Reform Push)

EASING NEEDED

The PBOC should cut the RRR and guide the over-5-year LPR down given the softening in credit in October, particularly mortgage loans, which dragged down growth in total social finance, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance.

He disagreed with arguments that the need for a RRR cut had been reduced because liquidity in the interbank market remains ample, saying a cut would deliver a positive policy signal to boost market sentiment and encourage lenders to continue supporting the real economy. (MNI: Chinese Developer Defaults Loom Despite Property Support)

The PBOC released its third quarter Monetary Policy Report late Wednesday, in which it warned of a possible pickup in inflation over the long term and described liquidity conditions as “appropriate”, while also stressing the role of policy banks and structural tools. Analysts interpreted the report as indicating limited room for an across-the-board easing this year.

But some analysts argue more easing is justified. Recent economic indicators point to a weak recovery, which doesn’t align with the target of stabilising growth, and liquidity demand should increase once the economy starts warming up, Wang Dan, chief economist at Hang Seng Bank China, told MNI.

Wang said the PBOC should boost credit through faster rate cuts to prevent deflation risk, which was highlighted by a contraction in October’s Producer Price Index and a tame Consumer Price Index. (See MNI BRIEF: China's Oct CPI Falls to 5 Month Low; PPI Declines)

SUFFERING SMEs

She noted lower interest rates would help SMEs who suffer higher borrowing costs than state-owned and big counterparts even though interbank liquidity is ample.

State-owned enterprises have access to more funds than they need as the PBOC pushes credit expansion to shore up growth, while smaller companies are hesitant to borrow for investments given the sluggish economy and heavy debt burdens, Wang said. She called on the PBOC to provide clear easing signals to boost confidence.

The RRR could be cut by 25bp-50bp in the first quarter as cash demand rises before China’s Spring Festival on January 22, which is around the same time a CNY700 billion of MLF is maturing, Industrial Securities analysts estimate.

The PBOC would use innovative targeted tools rather than policy rate cuts to support the real estate sector, private businesses, and consumption, said CITIC Securities chief economist Ming Ming. The RRR may be used to supplement liquidity as interbank liquidity condition have deteriorated this month to levels last seen in 2019, with the one-day and seven-day repo rates rising and approaching the relevant policy rate.