MNI PBOC WATCH: Weaker Yuan To Stay Rate Cuts In Coming Months

China’s reference lending rate will likely remain unchanged in coming months as banks cope with already-slim interest-rate margins and yuan weakness limits room for a policy rate cut, though a weak economy might still prompt easing later in the year, economists and analysts told MNI.

The loan prime rate (LPR), based on the People’s Bank of China’s Medium-term Lending Facility (MLF) rate and quotes submitted by 18 banks, remained steady for a ninth consecutive month at 3.65% for the one-year maturity and 4.3% for the over five-year maturity on Monday.

This came despite calls by some economists for easing to bolster recovery. But markets had expected the pause given that the central bank had already held its MLF rate unchanged this month and given lenders’ reluctance to lower their quotes for the LPR. (See MNI PBOC WATCH: LPR Change Unlikely Despite Calls For Cut)

Recent moves by banks reduce deposit rates have not been sufficient to maintain their margins, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co. The weighted-average loan rate dropped to a record-low 3.96% in March, he noted.

The yuan’s recent depreciation against the U.S. dollar also reduces the PBOC’s motivation to lower policy rates and guide down the LPR, Dong said.

YUAN WEAKNESS

The yuan slid sharply against the greenback in the middle of last week, with both the offshore CNH rate and onshore CNY breaking the USDCNY7 level as Chinese economic indicators pointed to weak growth in April and the dollar index rose.

But an advisor who asked for anonymity said that the PBOC will be given space for a rate cut if the Federal Reserve pauses in its hiking cycle.

Liang Si, a researcher at the Bank of China, said the PBOC still had space to provide further accommodative monetary policy while the economy continues to recover, and that short-term CNY/USD volatility will not alter its policy course.

But for the moment key money-market rates, including the seven-day repo rate, were already lower than the policy rates in May, liquidity remains ample and financing cost keeps falling, meaning there is no immediate need to cut the MLF and LPR rates, he noted.

FALLING MARGINS

Concern is rising among economists over falling interest-rate margins. According to Q1 reports from the 40 listed banks, interest margins dropped below the 1.8% limit at 19 of them. Another 14 banks had an averaged margin of 1.86%.

Wang Qing, chief macroeconomic researcher at Golden Credit Rating, said it would be hard for lenders to further lower their loan rates without the incentive of a PBOC policy-rate cut. But the over-five-year LPR could be lowered by 10-15bp should the property market recovery lose steam in Q2, he said.