MNI: PBOC To Make Slight Cuts In Q4, A-Share Rally Welcomed

The People’s Bank of China is likely to make a small policy-rate cut and reduce the reserve requirement ratio (RRR) this year in Q4 to boost prices and support fiscal expansion, with expected U.S. Federal Reserve easing giving it room to act, policy advisors and economists told MNI, noting the bullish A-share market will also help support domestic demand.

The central bank is likely to trim the 7-day repo rate by 10 basis points by year's end to reduce funding costs and ease deflation pressure, while a 50bp RRR cut – inline with May's reduction – also remains an option as bullish equity markets continue to attract deposits away from banks and reduce lenders’ stable funding sources, said Lian Ping, chairman of the China Chief Economist Forum.

PBOC data showed that more than CNY1 trillion in household deposits shifted into non-bank institutions such as securities firms and funds in July, flowing into the stock market, a trend set to continue should equity markets keep rising.

A potential Fed rate cut in September – or a series of reductions – would help narrow the wide China-U.S. interest rate spread and create a benign environment for PBOC easing, he noted.

While the PBOC will maintain an accommodative stance, advisors said large-scale easing is unlikely. The latest Monetary Policy Report emphasised the need to “implement accommodative monetary policy in a thorough and detailed manner,” consistent with the late-July Politburo meeting, and plus the interest margins of lenders have declined to a record low, suggesting a limited scope for any aggressive cut. (See MNI PBOC WATCH: LPR, RRR Cuts Seen Later In 2025; Held For Now)

MODERATE EASING 

One policy advisor said the PBOC has little incentive to act aggressively in the near term, citing 5.3% H1 GDP growth as a solid base for the 5% annual target, improving inflation expectations under the “anti-involution” campaign to curb destructive competition, a stable yuan below 7.20 against the dollar since May, and a steepening bond yield curve indicating reduced financial risks.

Still, the PBOC may need to ease further if fiscal authorities expand CGB issuance or policy banks increase borrowing later this year to fund investment and consumption, he said. (See MNI INTERVIEW 2: China Fiscal Stimulus Key To Deflation Fight)

Zong Liang, former chief researcher at Bank of China, said current policy aims to optimise the economic structure, with the growth target already within reach. He pointed to the recent targeted interest subsidies for consumption and services, which function similarly to selective rate cuts. In the context of weak loan demand, excessive easing could result in idle funds circulating in the system, raising financial risks, he warned.

STOCK MARKET KEY

Upward momentum in the stock market is crucial when inflation is subdued, as it encourages corporate listings, boosts household wealth, and supports consumption, Zong argued. The PBOC welcomes equity gains as they allow for more flexible use of monetary tools in support of the market, he said.

Lian agreed, noting monetary policy alone may not significantly raise prices given weak demand and sluggish income growth. In contrast, a rising stock market improves household income expectations, thereby stimulating consumption and investment.