China’s surprise RRR cut puts focus on bank lending rates

THE People’s Bank of China’s (PBOC) surprise easing action late last week has fuelled speculation banks may cut lending rates in coming months to help strengthen the economy’s recovery.

The central bank said on Friday (Mar 17) it will lower the reserve requirement ratio (RRR) for banks by 25 basis points, giving lenders more cash they can use to disburse loans. The move will also help drive down banks’ funding costs, allowing them to lower their interest rates over time.

Economists don’t expect a cut in bank rates just yet. Almost all predict the one and five-year loan prime rates to stay unchanged on Monday, according to a Bloomberg survey conducted before the RRR cut. The PBOC will publish the data at 9.15 am local time.

However, there could be scope for lower rates later this year. UBS Group said there may be a 10 basis-point reduction in loan prime rates in the remainder of 2023, “which could help lower the actual funding cost for the real economy and mortgage rates”.

The RRR cut — which will take effect from Mar 27 — caught many analysts off-guard as it wasn’t telegraphed by the State Council, China’s cabinet, ahead of time — as had been the case for the previous two reductions last year.

The PBOC’s move followed days after a new leadership was ushered in at the National People’s Congress, the annual parliamentary gathering, and where the government outlined its economic goals for the year, including a gross domestic product (GDP) target of around 5 per cent.

The Economic Daily, a newspaper affiliated with the State Council, said in a Saturday commentary the RRR cut sends a “clear signal” that the authorities intend to guide financial institutions to better stabilise growth, expand domestic demand and consolidate the recovery.

The PBOC’s action comes against the backdrop of heightened turmoil in financial markets, triggered by a global banking crisis, as well as a still-uncertain recovery in China’s economy.

While consumer spending and investment in China rebounded in the first two months of the year after pandemic restrictions were dropped in December, unemployment rose, property investment continued to contract and exports fell.

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“The economic data is not as good as expected,” said Iris Pang, chief economist for China at ING Groep. The RRR cut could “help to lower market interest rates, which could help to lower bond issuance interest costs. This may benefit real estate property developers and local government financial vehicles for their funding needs”, she said.

A supplementary reason could be “to provide a cushion against any potential negative impact from global market turmoil”, she said.

The PBOC said on Friday the cut in the reserve ratio was aimed at maintaining “reasonable and sufficient liquidity” and ensuring that money supply increases in line with nominal economic growth. The central bank added it won’t engage in “flood irrigation”, a term it uses to refer to large stimulus.

Beijing’s moderate GDP growth target this year signals it will rely on a recovery in consumer spending to reach its goal while avoiding large-scale monetary and fiscal stimulus.

PBOC governor Yi Gang, who was recently reappointed to his post, said at a press conference this month that current interest rates were appropriate. He added that cuts to the reserve ratio could be an “effective tool” to support the real economy. BLOOMBERG