MNI STATE OF PLAY: Analysts See PBOC Point To Lower August LPR

China’s benchmark Loan Prime Rate (LPR) is likely to be pushed lower next Monday following the People’s Bank of China’s surprise cut to key policy rates on Aug. 15, as it seeks to boost credit demand and reverse the slowing post-lockdown economic recovery, according to analysts.

The PBOC unexpectedly trimmed 10 bps from rates across the curve this week, bringing the 7-day reverse repo rate to 2.0% and the 1-year medium-term lending facility (MLF) rate to 2.75%. The move was seen as a response to recent weak credit data as well as July’s softening production, consumption and investment figures.

LOWER LPR

The LPR, based on the MLF rate and quotes submitted by 18 banks, should see at least a 10-bps drop when the PBOC releases the August quotation, according to Ming Ming, chief economist of CITIC Securities. Currently, the LPR sits at 3.70% for the one-year maturity and 4.45% for the five-year tenor.

Ming even highlights the possibility of a greater than 10-bps reduction, as banks may submit lower quotations given their declining liability costs amid decreasing deposit rates. However, Ming posits that a lower 5-year LPR is more important to help boost residents’ and enterprises’ willingness to increase longer-term leverage, while keeping any cut to the 1-year LPR to a more modest level to avoid arbitrage opportunities.

The 1-year and 5-year LPR will likely drop by 10 and 25 bps, respectively, said Li Chao, chief economist at Zheshang Securities. A bigger cut to the 5-year rate, on which many lenders base their mortgage rates, will help to stimulate housing demand, hedging the negative impact of the recent mortgage boycott on unfinished property projects across the country, according to Li.

Slower-than-expected loan growth – posting just CNY679 billion in July – reflects paltry demand, with the total social financing rising only CNY756 billion, a six-year low, data by the PBOC released last Friday showed.

The key purpose of rate cuts this time is to help promote credit expansion, indicating the primary goal of PBOC remains to stabilize growth and ensure employment, said Li.

ADDITIONAL STIMULUS

Weaker-than-expected July economic indicators have raised concerns for a stagnation to the economic rebound that came after Covid lockdown restrictions were eased. Industrial production and retail sales faced renewed disruptions amid new sporadic outbreaks of Covid-19 cases, while property investment continued to slump amid sluggish sentiment despite a moderate pickup in infrastructure investment. Especially concerning is the surge in the youth unemployment rate to a historical high of 19.9% in July.

In the face of renewed downward pressure, Ming believes incremental monetary and fiscal policy loosening, as well as relaxations to real estate regulations, will follow in a fresh easing cycle.

Analysts from ANZ have penciled in a 50-bps cut in the reserve requirement ratio as the second half of the year progresses because of CNY2.6 trillion of maturing MLFs in the next few months.

Wen Bin, chief economist from China Minsheng Bank, is eyeing a 25-bps RRR cut in Q4 should real estate financing recovers to meet an increased need for long-term funds. Nor is Wen ruling out the possibility of a further rate cut if the pace of the Federal Reserve’s rate hike slows down.

Premier Li Keqiang on Tuesday urged economic powerhouse regions to take the lead in stabilizing growth, with the economy at the most arduous point of its recovery. Such regions, including Guangdong, Jiangsu and Zhejiang, were urged to find ways to boost spending on automobiles and housing, while utilizing funds from bonds already issued to accelerate infrastructure construction, according to a statement on the government website.