MNI STATE OF PLAY:China 5-Yr LPR Eyed As Policy Turns Cautious

China’s reference lending rate may see a cut in the five-year tenor later this year but conditions are cautious now as bank interest margins narrow, and rising inflation and accelerating economic recovery keeps policy in check, market analysts said.

The Loan Prime Rate, based on the rate of PBOC’s Medium-term Lending Facility and quotes submitted by 18 banks, remained MNI BRIEF: China July Loan Prime Rate Kept Unchanged at 3.70% for the one-year maturity and 4.45% for five years on Wednesday, (See: MNI STATE OF PLAY: China LPR Seen Steady As Deposit Rates Key).

LPR stability resulted from the PBOC’s unchanged MLF rate on July 15th and banks’ reluctance to lower LPR quotes due to narrower net interest margins, said Wen Bin, chief economist at China Minsheng Bank. Wen said lenders suffer from a rapid drop in interest rates for both company loans and house mortgages, while deposit rates lag.

According to China Banking and Insurance Regulatory Commission, the net interest margin of commercial banks fell by 11bps as of the end of March to 1.97% from 2021. The PBOC data showed that the new corporate loan rate dropped to 4.16% in June, 34bps lower than the same period of last year, while interest rate of new fixed time deposit reduced by16bps last month from 2021 end.

Analysts from Everbright Securities said policymakers could create space for an LPR reduction later this year via lowering provisioning coverage ratios for bad loans or guiding deposit rates down further.

POLICY RATE

The PBOC left the rate on its one-year MLF unchanged at 2.85% on July 15, unchanged for six months, when it rolled over the CNY100 billion maturing under the facility.

Yan Yuejin, director of E-house China Research and Development Institute, said the current low real interest rates have been boosting economy at an effective pace, so there is less need for further interest rate cuts.

Wen agreed that policy has moved to an “observation period” as the economy has showed positive signals. Consumer prices meanwhile are on the increase as pork prices gain along with imported inflation. The aggressive rate hikes of the U.S. Federal Reserve would further provoke PBOC caution on policy rates.

FIVE-YEAR LPR

But the five-year and higher LPR tenors, a reference for mortgage rates, is expected to see a further cut as mortgage boycotts on unfinished units in many cities draw official concern.

The PBOC unexpectedly announced the largest ever cut to five-year and higher tenors of LPR in May to boost mortgage lending and prop up a sluggish housing market.

Wang Qing, a researcher at Golden Credit, said compared with the one-year tenor, the long-term LPR is likely to fall even without a MLF cut considering lenders’ deposit rates have dropped.