MNI STATE OF PLAY: China LPR Seen Steady As Deposit Rates Key

The People’s Bank of China is on hold for policy rate cuts on excessive stimulus concerns as it instead moves to guide deposit rates down to make it possible for banks to offer lower cost loans, policy advisors and market analysts said, predicting the Loan Prime Rate would remain unchanged this month.

There is limited room left for the central bank to cut its major policy rates as the real weighted-average loan rate of companies dropped to a record low at 4.16% in June.

As a result, a further reduction in the LPR means interest rates for qualified firms can dip below the referenced 3.7% for the one-year tenor LPR, which would incite arbitrage and undermine policy effects, said Wang Yifeng, analyst at Everbright Securities.

LPR is announced on Wednesday and it would be the second consecutive month that the central bank kept the key policy rate unchanged after it made the largest ever cut to 5-year and above tenors of LPR by 15 bps in May. The one-year MLF rate, which the LPR is pegged to, was unchanged at 2.85% on June 15.

WAIT FOR THE FUTURE

Some high-ranking policy advisors suggest it would be more effective for the central bank to save ammunition against future uncertainties as market entities are reluctant to borrow and liquidity has piled up in the interbank market.

Wang Yiming, member of the PBOC’s monetary policy committee, said in a recent forum that macro policy should not place an overdraft on the future and increase debt burdens. The focus is to bring the economy back to a normal track in the second-half of the year under announced stimulus policies.

He said monetary policy is also restrained by overseas policy tightness, which could disturb China’s financial and economic stability via capital outflows and yuan volatility. (See: MNI: Yuan Seen Boosted In Q4 If U.S. Enters Recession-Analysts)

Overseas demand for Chinese products would also get soft, weighing on exports, he said.

DEPOSIT RATES

The PBOC has reiterated that it will liberalise the deposit system so that borrowing costs can follow down after it set 10-year government bond yields and the one-year LPR as banks’ references for pricing their deposit rates in April.

Recently, the five-year time deposit rate of some big banks eased below their three-year products, which has aroused wide attention.

Zhang Jiqing, analyst at Huatai Securities, said in a note that the reforms for the deposit pricing mechanism has made lenders more independent to adjust deposit rates as long-term deposits are less attractive when liquidity is ample and the property sector is sluggish, (see MNI: Some China Developers Desperate As Debt Peak Looms).

There is more room for deposit rate to go down as the PBOC enhances policies to revive growth, Zhang estimated.

AMPLE LIQUIDTY

Even though the central bank conducted CNY3billion of “mini open market operations” in 10 consecutive trading days from July 4, the seven-day reverse repo rate of deposit institutions has kept in a level much lower than its respective policy rate. (See: MNI: PBOC Drains Interbank Liquidity To Curb Leverage).

Guan Tao, chief global economist of BOC International, said monetary policy has been looser than the hardest time of the pandemic outbreak in 2020.

As of the end of June, increases in M2 have outpaced that of the total social financing for three months and the outstanding yuan loans of lenders was also lower than M2 growth in the past two months, indicating the liquidity has been “more than ample”, (See: MNI: Warnings As China Interbank Liquidity Feast Bill Near Due).

The effectiveness of pronounced easing stance is also doubtful. Chen Daofu, senior fellow at Development Research Center of the State Council, said monetary policy should not play a major role in stimulating the economy, and weak credit demand has potentially undermined the use of targeted tools, he warned.

Analysts at Shenwan Hongyuan Securities predicted the necessity for the PBOC to change its policy rate and the reserve requirement ratio in short term is reducing.