The Business Times

China banks keep rates flat, confirming policy stability

Published Wed, Jul 21, 2021 · 05:50 AM

Beijing

BANKS in China kept the benchmark loan rate unchanged, indicating that the central bank is continuing to keep policy stable despite a recent surprise move to add liquidity to the financial system.

The one-year loan prime rate (LPR) was kept at 3.85 per cent, the same level it has been since April 2020, according to a Tuesday release from the People's Bank of China (PBOC). That follows statements from the central bank that the liquidity added last week did not represent a change of policy, disappointing some in the market who had hoped for more stimulus.

The steady rate suggests that lenders and the central bank are satisfied with the levels of interbank liquidity and monetary support for now, especially with data last week showing the economic recovery became more balanced in June. The second-quarter data suggests Beijing can comfortably meet its growth target of more than 6 per cent for the year, even with high commodity prices making things more difficult for many firms.

"This reinforced our view that the earlier RRR (required reserve ratio) cut does not signal a change in monetary policy stance," said Liu Peiqian, an economist at Natwest Group. In the second half of this year "we expect PBOC to maintain a neutral monetary policy stance and keep benchmark interest rates unchanged as growth rates slow towards its long-term potential".

The five-year LPR, which is a reference for mortgages, was also unchanged at 4.65 per cent. The LPR has been considered China's de facto benchmark funding cost since 2019. The rate is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank's medium-term loans.

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The central bank announced a cut to the RRR earlier this month, prompting speculation that it had reversed course and started adding stimulus to support economic growth. The change went into effect last week and meant that banks could lend more as they have to keep about one trillion yuan (S$210 billion) less cash in reserve.

"Today's LPR is a bit disappointing to the market," said Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group in Shanghai. "The authorities will focus on aggregate funding cost reduction in H2. We believe more easing measures will be seen later, including green MLF and green relending."

The central bank may have room to cut the RRR further this year, according to analysts cited in a front page article in the China Securities Journal. Such a move would be mainly aimed at offsetting liquidity demand rather than easing policies, they said.

China's short-term interbank funding costs climbed for a second day on Tuesday after the interest rate decision. If interbank liquidity spikes as it did in January, the PBOC could step in to push it back down through one of its policy tools such as open market operations, another RRR cut or medium-term loans.

There are trillions of yuan in such loans expiring between now and the end of the year, as the one-year loans the PBOC made last year to support the economy through the pandemic mature. Depending on the market liquidity conditions, the PBOC can roll over some or all of these loans, or let them expire, which could reduce the amount of money in the interbank market.

Banks may need extra funds in the second half of this year if they are to purchase the government bonds expected to hit the market during that period. The sale of government debt in the first half of 2021 has been slower than last year, and that pace will need to pick up if the government is to sell all the 4.5 trillion yuan in government debt in the annual plan.

China's top leadership should give some indication of their economic plans sometime this month. The Politburo usually meets in July to assess the economy in the first half of the year and plan for the second half.

"The steady LPR can contain market expectations on further easing for now," according to Zhou Hao, senior emerging markets economist at Commerzbank. "China's monetary policy remains stable, and possibility of large-scale easing in H2 is still very low." BLOOMBERG

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