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Free AccessMNI SOURCES: Real Lending Rates May Drop As China Eases Credit
--Too Early for Benchmark Rate Cut; Possible If Further Slowdown
--Yuan Depreciation Restricts PBOC's Room to Cut Rates
BEIJING (MNI) - China's real lending rates may drop in the next two months
after the People's Bank of China eased credit controls and encouraged banks to
lend more to small businesses, sources close to policymakers told MNI.
"The declining money market rates, resulting from the loosening stance of
the PBOC, will lead to lower lending rates in the third quarter, particularly
when the PBOC stokes lenders' risk appetite," one source told MNI.
But the central bank may not be ready to cut benchmark rates unless soft
lending doesn't trigger a rebound and the economy stalls further, the source
added.
The comments from policy sources are consistent with the Chinese
leadership's decision to increase credit support. Guo Shuqing, chairman of China
Banking and Insurance Regulatory Commission, urged heads of major banks back on
July 17 to boost credit to small businesses and "significantly" reduce lending
rates.
China's deleveraging measures have increased costs for businesses to obtain
credit. According to the PBOC's first quarter Monetary Policy Report, the
weighted average borrowing rate for the non-financial sector was 5.96% at the
end of March, up 0.22 percentage point from last Q4.
--SMALLEST TSF EXPANSION
It may be more difficult in practice getting banks to comply. Credit policy
was eased as early as June, when big lenders were reportedly given additional
quotas, yet total social finance (TSF) for the month expanded by 9.8% on a y/y
basis, the slowest increase on record.
"A serious problem now is that banks are not presented with many qualified
assets for them to lend against, so they hold onto their credit quotas," a
source said. If TSF remains weak for the third quarter, the PBOC may consider
cutting benchmark rates, said the source.
Since 2008, the PBOC conducted major loosening three times, usually
accompanied by benchmark rate cuts. The decision from the politburo meeting on
Monday further confirmed an easing approach, so cutting rates to resuscitate the
economy is a possibility.
However, the PBOC's ability to cut benchmark rates may be constrained by
other competing objectives.
--FULL-SCALE LOOSENING
"Benchmark rate cuts signal full-scale loosening, which compromises the
deleveraging campaign," said another source close to the PBOC. Given rate hikes
in the U.S. and pressure on yuan depreciation, cutting rates across the board
carries a lot of risks, so more targeted measures are preferred," the second
source said.
Both the stock market crash in 2015 and the property bubble in recent years
resulted from excessive easing, so policymakers are careful not to repeat that
mistake. Three RRR cuts this year were all targeted at more vulnerable parts of
the economy.
"The policy priority now is to stop strict tightening and expand credit"
and wait to see the impact, the source said.
China's goal of keeping the yuan stable against major currencies is also
constrains, as The currency has lost 5% this year against the dollar on a
stronger U.S. economy, Federal Reserve moves to raise rates and its punitive
measures against Chinese exports.
--CAPITAL OUTFLOW PRESSURE
"Further sharp depreciation may trigger capital outflows and reduce forex
reserves,something the PBOC must take into consideration," the second source
said.
The PBOC also has a smaller weapon to protect its currency, compared with
the yuan's last round of sharp depreciation in 2015-2017: the world's biggest
forex war chest has shrunk to USD3.1 trillion last month from USD3.8 trillion in
January 2015.
"Capital outflow pressure for the country is still big in the future as the
yuan continues to fall against the dollar," that source added.
China's forex purchases by banks plummeted by 89.4% from May's level to
CNY13.1bn. while banks were net forward forex buyers on behalf of their clients
in June, suggesting market participants are betting on a weaker yuan.
--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com
--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: MAQDS$,MMQPB$,M$A$$$,M$Q$$$,MGQ$$$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.