MNI STATE OF PLAY: PBOC In Wait-And-Watch Mode On Key Rates

China’s key reference lending rate is expected to remain unchanged this coming Monday as the People’s Bank of China refrains from further divergence from U.S. monetary policy that could encourage more capital outflows and pressure the yuan, market analysts said.

The June Loan Prime Rate (LPR), to be released by the PBOC on June 20 based on quotes from 18 banks, is likely to remain at 3.7% over one year rate and 4.45% for five years and above.

The one-year medium-term lending facility, used as a reference price for the LPR, was held steady by the PBOC at 2.85% on June 15, when CNY200 billion of maturing MLF rolled over, and lenders face operational pressure to lower their quotes for LPR, noted Zhou Maohua, analyst at China Everbright Bank.

Zhou added that a hold on rate cuts is in place at present as policymakers assess the effectiveness of the previous easing moves. Indicators show the property market and economic activity is improving, said analysts.

The rollover of MLF was unexpected as analysts had estimated that more issuance of local government special bonds may prompt the central bank to increase liquidity injections this month.

Yang Yewei, analyst at Guosheng Securities, said the rollover of the MLF indicated the PBOC is satisfied with liquidity in the interbank market for now as the mid-point of the seven-day repo rate, a gauge for liquidity condition, now is about 1.6%, much lower than its referred policy rate at 2.1%. This indicates conditions are quite loose which is expected to continue in coming months as credit demand from companies and households is soft.

In addition, the PBOC needs to balance its policy considering the aggressive tightening of the Fed, analysts noted. (MNI STATE OF PLAY: Fed Lays Path To Restrictive Stance)

LIQUIDITY

Sun Binbin, analyst at Tianfeng Securities, noted the room for policy rate reductions are limited since the Fed’s latest rate hike, as a stronger dollar and higher U.S. Treasury yields weigh on China’s capital flows and currency.

It is more appropriate for the central bank to ensure liquidity is ample via a cut in the reserve requirement ratio and relending facilities rather than rate reduction, Sun suggested.

Analysts said any reduction in the LPR in the future depends on more RRR cuts to reduce lenders’ funding costs.

GROWTH

However, the central bank needs to remain accommodative as the recovery of the economy is still tepid as seen by a contraction in the services sector in May.

Wu Ge, economist at Changjiang Securities, predicted GDP may print at 4.8% in Q4 after 1.8% in Q2 and 5% in Q3, resulting a 4.1% GDP growth for 2022, if there is not additional policy support.

The chances of a quicker outflow of capital and a weaker CNY are also factors for any policy easing ahead as China’s interest premium has been wiped out against U.S treasuries, analysts said.

Huang Yiping, professor at Peking University, said in a recent forum that the regulator may need to tighten capital controls to leave more policy room against a background of economic slowdown and the Fed’s accelerating hikes, pointing out capital outflow risks must be carefully watched.

Li Chao, economist at Zheshang Securities, pointed the PBOC could restrain its easing pace if international payment conditions worsen in Q3 on further Fed moves.

YUAN

For the CNY, the dip against the dollar to CNY6.8 in May from CNY6.3 in March shows the extent of pressure on the currency

Analysts at China Construction Bank predicted CNY6.8 as a key support level if the yuan drops quickly after breaking CNY6.7. Sun Binbin said the yuan may fall to a range of CNY6.9 to CNY7.0 if the dollar index rises around 108 in the short term.

According to a survey by Securities Times, a paper under the state-owned People’s Daily, covering 100 economists, analysts, and policy advisors, 90% of the participants predict the yuan would swing in a band of CNY6.5 to CNY6.9 in Q3.