MNI PBOC WATCH: LPR On Hold Amid Rebound; Alert To SVB Fallout

China’s reference lending rate is expected to remain steady as the ongoing recovery keeps the central bank on the sideline with ample tools to boost growth if needed, while also monitoring any impact on the yuan or cross-border capital flows from the collapse of Silicon Valley Bank, economists and analysts said.

The loan prime rate (LPR), based on the rate on the People’s Bank of China’s medium-term lending facility (MLF) and quotes submitted by 18 banks, is expected to remain at 3.65% for the one-year maturity and 4.3% for the over-five-year maturity on Monday.

The need for the PBOC to lower its policy rates or the reserve requirement ratio (RRR) has fallen after it injected more long-term liquidity via the medium-term lending facility (MLF) to offset rising funding costs amid robust credit expansion, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. He noted the economy was rebounding, but said there was a chance of a reduction of five-year LPR in the first half of the year to guide down the rate on new mortgages. (See MNI INTERVIEW: China Needs Govt Property Fund, Rate Cuts –Senior Adviser)

The PBOC offered a net CNY281 billion through a one-year MLF on March 15, with the rate unchanged at 2.75%. It was the largest monthly net injection since 2021 and the eighth month that the rate was unchanged.

China Minsheng Banking Corp chief economist Wen Bin attributed the sizeable MLF operation to strong credit demand, which pushed up rates in the wholesale market and to increasing government bond issuance that had drained interbank liquidity.

The 7-day reverse repo rate rose to an average of 2.1% in February compared to its policy rate of 2%, indicating a moderate tightness of liquidity in the interbank market. Similarly, the yield on one-year negotiable certificates of deposit (NCD) jumped as high as 2.75%, which was in line with the MLF rate and well above the 90bps discount NCDs traded at relative to the MLF last August, underlining the demand for MLF funding.

GROWTH REBOUNDS

Data from the National Bureau of Statistics released Wednesday showed consumption rebounded strongly in the first two months of 2023, with retail sales up 3.5% y/y compared to a 2.7% decline in the fourth quarter. Property investment fell 5.7% y/y, beating market expectations and marking a big improvement on the 10% y/y decline in 2022.

The welcome improvement in growth, coupled with the fast expansion of credit and M2, lessened the need for a cut to the policy rate and RRR, allowing the PBOC to save its ammunition to deal with possible headwinds from the economy or financial markets, said Zhang Xu, analyst at Everbright Securities. Given the RRR works to cushion financial risks and the ratio for small banks has been dropped to 5%, the room for a RRR cut is limited, he noted.

SVB FALLOUT

The impact from the collapse of Silicon Valley Bank on China’s financial system was assessed by economists to be limited.

Wang said the PBOC was likely to insist on its policy independence even if concerns about smaller U.S. banks curbed the pace of Federal Reserve rate hikes, though it would monitor any outbreak of volatility in the yuan exchange rate and capital flows.

Zhou Hao, chief economist of Guotai Junan Securities, said the yuan would rise to 6.40 against the dollar by the end of 2023 should the Fed cuts rate by at least 25bps and the U.S. Consumer Price Index fell.