MNI PBOC WATCH: June LPR To Hold, Ample Liquidity Seen

China’s Loan Prime Rate (LPR) is expected to remain unchanged this month following a 10-basis-point cut in May, as the central bank opts for a moderate approach in rate reduction through the rest of the year while ensuring ample interbank liquidity to support credit demand and government bond issuance.

Authorities on Friday are likely to hold the one-year LPR at 3.0% and the five-year rate at 3.5%. Both were cut by 10bp in May after the People’s Bank of China (PBOC) lowered its 7-day reverse repo rate – its key policy benchmark – by 10bp to 1.4% on May 8, followed by a 50bp cut to the reserve requirement ratio (RRR) on May 15.

Lian Ping, chairman of the China Chief Economist Forum, said the PBOC could deliver another 10bp cut to the 7-day reverse repo rate and a 50bp RRR reduction in the second half of the year to offset the impact of U.S. tariffs and sluggish domestic demand. However, officials will tread carefully given the repo rate is already at a historic low, he added, warning of the risk of entering a Japan-style zero-bound trap. (See MNI: Tariffs, Weak Demand To Drive Moderate PBOC Easing In H2)

Economic data for May released by the National Bureau of Statistics on Monday showed mixed signals. Compared to April, most indicators weakened – except for consumption, which was buoyed by trade-in stimulus policies. Meanwhile, exports declined as the impact of tariffs on production and manufacturing investment became more evident. The property downturn deepened, and infrastructure investment retreated from elevated levels.

In the near term, market attention is focused on the China-U.S. tariff negotiations, property sales, and export trends.

TREASURY PURCHASES

Given the ongoing trade uncertainties and weak domestic demand, the PBOC is expected to step up efforts to incentivize credit growth and align with fiscal expansion.

The central bank is likely to restart government bond purchases in August, shifting its policy focus from managing bond yield volatility to supporting credit growth, with net bond issuance expected to rise in Q2 and Q3.(See MNI: PBOC Seen Resuming Bond Purchases As Gov't Issuance Rises)

The PBOC had suspended purchases in January after speculation over easing drove the 10-year China Government Bond (CGB) yield to a record low of 1.60%, down from 2.0% in November, flattening the curve. In its Q1 Monetary Policy Report released in May, the PBOC said it would resume purchases “when market conditions permit” and pledged to “closely monitor treasury yield changes.”

Wang Qing, a researcher at the Chinese Academy of Social Sciences, said renewed bond-buying would help guide interest rates lower, reduce lender borrowing costs, and encourage loan expansion. The PBOC may need to increase both the scale and frequency of its outright reverse repos should deposit rates keep falling and banks continue to face liability-side pressure, he said.

TRADE DEAL HOPES

Policy advisers remain optimistic that a trade deal could be reached before the 90-day tariff truce expires in mid-August, paving the way for a meeting between the two countries' presidents later this year. (See MNI: China Advisors Hopeful Of US Trade Deal By Mid-August) Zhao Yongsheng, a fellow at the University of International Business and Economics, said the 24% suspended tariffs and the 20% fentanyl-related tariffs are likely negotiable under a deal. However, removing the 10% reciprocal tariff may prove more difficult for the U.S. to accept.