MNI PBOC WATCH: Rate Cuts Pushed Out, Structural Tools Eyed

The People’s Bank of China is likely to delay policy rate cuts until next year, even though another reserve requirement ratio reduction is a possibility before year-end, while policymakers continue to emphasise the role of structural facilities to support key sectors identified for the next five years.

The Loan Prime Rate was held at 3.0% for the one-year tenor and 3.5% for the five-year and above on Thursday. Both were cut by 10bp in May after the PBOC lowered its 7-day reverse repo rate – the benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp cut to the reserve requirement ratio on May 15. (See MNI PBOC WATCH: LPR To Hold, CGB Purchases To Rise)

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, told MNI recently that another RRR cut next month following the Central Economic Work Conference is possible, but near-term LPR easing remains unlikely given banks’ narrowing interest margins. (See MNI: PBOC To Increase CGB Purchases, Add Longer Tenors)

The Bank’s latest Monetary Policy Report highlighted the need to “conduct cross-cyclical adjustments”, the first such reference in five quarters. Analysts expect the central bank to prioritise medium- to long-term structural issues rather than pursue aggressive “counter-cyclical” easing, particularly as 2026 marks the start of the 15th Five-Year Plan, which stresses economic transformation alongside stable growth.

EASING NEEDED

Still, the economy is likely to need more easing to stimulate credit demand, given the broad weakening in October’s investment, consumption and industrial production data, while exports also turned negative, according to the National Bureau of Statistics.

The PBOC’s report detailed how it would foster a growth model more driven by domestic demand, consumption and endogenous momentum, signalling stronger use of relending tools targeted at policy-priority sectors.

Harry X. Wu, professor at Peking University’s National School of Development, told MNI that China must pursue deep institutional reform and a rules-based market system underpinned by the rule of law. Failure to do so risks trapping the economy in prolonged stagnation, or a “middle-income trap,” he warned, estimating China’s current potential growth rate at around 4%.

Sheng Songcheng, former head of the PBOC’s statistics department, has also pointed to structural challenges that continue to weigh on the economy and persistent excess capacity, noting the third-quarter industrial utilisation rate of 74.6% remains below the 2006-2019 average of 77%.

Sheng added that the shift to a consumption-led model must be accompanied by a stronger virtuous cycle between spending and investment if China is to sustain average GDP growth above 4.5% over the coming decade.