MNI PBOC WATCH: LPR Seen Steady As Prior Easing Feeds Through

China's Loan Prime Rate is seen remaining unchanged this month as the People’s Bank of China calculates that earlier interest rate cuts and reserve requirement reductions are continuing to take effect and as it relies on structural and liquidity tools for monetary easing.

The LPR is set to be held at 3.0% for the one-year maturity and 3.5% for the five-year-and-over tenor on Monday. Both rates fell in May by 10 basis points after the PBOC lowered the seven-day reverse repo rate – its benchmark policy rate –  by 10bp to 1.4% on May 8, and then reduced RRR by 50bp on May 15.

PBOC Vice Governor Zou Lan told reporters on Monday that effects of the measures already implemented will continue to emerge and that policy transmission takes time. The Bank will insist in its accommodative stance, calibrating the strength and pace of policy in order to support annual economic goals, he said. (See MNI: China's GDP Faces H2 Growth Challenges)

Officials will be cautious before cutting rates, given that the PBOC began its easing cycle in 2018 during the first China-U.S. trade war and that the seven-day reverse repo rate is already at an historic 1.4% low, Lian Ping, chairman at the China Chief Economist Forum, told MNI. Cutting rates too quickly would increase the risk of falling into the zero-bound trap that ensnared Japan, he warned. 

However, Teng Tai, director of WANB New Economy Research Institute, argued China may inevitably need to adopt zero or even negative interest rates – drawing on overseas experience – to emerge completely from deflation. Whether China’s monetary policy should swiftly shift toward zero or negative interest rates will be a key test of its ability to overcome deflation in a timely manner, he said, citing a sharp decline in average returns on investment across the economy.

AMPLE LIQUIDITY 

Growth in both investment and consumption slowed month-on-month in June, and the property sector saw further declines, even though Q2 GDP growth was robust at 5.2% in line with expectations. 

Zou pledged that the Bank will ensure ample liquidity and flagged the role of structural tools in supporting weak and key sectors. The PBOC on Monday unexpectedly announced CNY1.4 trillion in outright reverse repo operations, injecting a net CNY200 billion into the interbank market. (See:MNI: PBOC Seen Resuming Bond Purchases As Gov't Issuance Rises)

The PBOC may have to expand the scale and frequency of its outright reverse repos should deposit rates continue to decline and lenders face persistent liability-side pressures, said Wang Qing, assistant research fellow at the Institute of Finance and Banking, Chinese Academy of Social Sciences. 

YUAN

Asked about the yuan by MNI, Zou noted that the currency has remained stable below the 7.2 level against the dollar since the release of the joint statement following China-U.S. trade talks in Geneva in May, following its fluctuations in early April. 

While the PBOC has maintained its stance of keeping the exchange rate stable amid tariff-related uncertainty, it is generally more tolerant of yuan appreciation than depreciation, a policy adviser told MNI, noting however  that the central bank will not allow excessive gains against the dollar. A stronger yuan would support Chinese asset prices, aligning with its broader mandate to boost capital markets, the advisor said. (See MNI: PBOC Seen Guiding Slow Yuan Strength Amid Trade Talks)

Zou said China does not seek to gain international competitive advantage through currency depreciation, and added that while uncertainty persists around the dollar’s trajectory, China’s domestic fundamentals continue to improve and support the yuan’s performance.