MNI PBOC WATCH: Sept LPR To Hold, Easing Seen On Econ Slowdown

China’s Loan Prime Rate is expected to remain unchanged in September, but a deepening economic slowdown increases the likelihood of further easing in Q4, with bond purchases emerging as a possible option, policy advisors and analysts told MNI.

The one-year LPR is set to be held at 3.0% and the five-year at 3.5% on Monday. Both rates fell by 10 basis points in May after the People’s Bank of China lowered its 7-day reverse repo rate by the same margin to 1.4% and trimmed the reserve requirement ratio (RRR) 50bp later that month. Although the PBOC has left key policy rates steady for four months, advisors expect moderate easing later this year as growth indicators deteriorate, particularly in Q4. (See MNI: PBOC To Make Slight Cuts In Q4, A-Share Rally Welcomed)

August data from the National Bureau of Statistics showed investment, consumption and exports all falling month-on-month, fixed asset investment growth at a five-year low, unemployment at a six-month high and CPI down 0.4% y/y.

Lian Ping, chairman of the China Chief Economist Forum, forecast a 10bp 7-day repo cut by year-end and said a further 50bp RRR reduction was also possible, with buoyant equities drawing deposits away from banks and tightening lenders’ funding. The U.S. Federal Reserve’s September rate cut – or a series of easing – would help narrow the wide U.S.-China interest rate gap and ease pressure on the yuan, he added.

BOND BUYING

Calls for the PBOC to resume government bond purchases are rising. Wang Qing, researcher at the National Institution for Finance and Development, said such operations would lower borrowing costs and encourage banks to extend more credit. (See MNI: PBOC Seen Resuming Bond Purchases As Gov't Issuance Rises)

New bank loans fell to CNY590 billion in August, down CNY310 billion y/y, reflecting weak demand amid trade frictions, a sluggish property recovery and fading fiscal stimulus.

However, a policy advisor familiar with PBOC operations said while bond purchases could resume to absorb increased government bond issuance, the central bank would avoid letting yields fall too far, risking speculative flows and crowding out investor demand.

Bond yields have risen sharply, with the 10-year CGB yield climbing to 1.83% in early September from 1.59% in January when the PBOC suspended buying to curb speculation. Analysts warn the slide in bond prices could undermine market stability, making the Bank’s end-month operation statement critical.