Asia Times (Feb. 20) – China lowered the rate at which banks would lend money to borrowers on Thursday, a move some say indicates an accommodative monetary policy without signalling a flood of money in an economy looking to rein in debt.
The one-year loan prime rate (LPR) was lowered to 4.05% from 4.15% and the five-year rate was cut to 4.75% from 4.80%. The LPR is the reference rate against which all new loans, and outstanding floating-rate ones, are priced against. It is published monthly, and set based on quotations provided by banks.
Earlier this week, a 10 basis-point reduction in the rate on the one-year medium-term lending facility to 3.15% was made by the People’s Bank of China (PBOC). That was a precursor to Thursday’s move.
“The latest LPR cut will help companies weather the damage from the coronavirus at the margins. But even if the decline is passed on to all borrowers, that would only decrease average one-year bank lending rates from 5.44% to 5.34%. The ability of firms to postpone loan repayments and access loans on preferential terms will matter more in the near-term,” said Julian Evans-Pritchard, Capital Economics’ senior China economist, in a note.
Still, a major flood of liquidity was unlikely to hit the banking system.
“The market never really bought the story that PBOC will do a lot on policy rates. Liquidity injections were aimed mainly at keeping funding conditions stable, especially keeping the repo markets functional. PBOC seems to be using the playbook of central banks coming in early after a shock to the system to keep markets functioning but taking a more patient approach on easing,” said Shaun Roache, S&P’s chief Asia-Pacific economist.
The PBOC also announced the total social financing (TSF), a broad measure of credit and liquidity in the economy, grew 10.7% in January, the same as December. Growth in the broad M2 money supply last month slowed to 8.4% from 8.7% in December.
“A massive credit loosening like in 2009 is unlikely as PBOC’s 4Q Monetary Policy Report published yesterday said that growth of M2and total social financing should be only slightly higher than that of nominal GDP in counter-cyclical adjustment, to avoid an over 10ppt increase in debt-to-GDP ratio like in 2009-17,” said Morgan Stanley analysts in a note.
The cut in the 5-year LPR comes after a number of local governments such as those in Shenzhen, Suzhou and Wuxi announced relaxations in housing policies. The support to the sector is now being extended via cheaper credit, analysts say.
“The decline in the five-year LPR, upon which mortgages are priced, may reflect a softening in the policy stance towards the real estate sector. Admittedly, it’s still too early to be sure since the first cut to the five-year LPR last November did not feed through to lower mortgage rates, which were kept elevated by regulatory controls. But given the recent collapse in property sales due to the coronavirus outbreak, policymakers may now be leaning towards a more supportive stance,” said Evans-Pritchard in a note.
Still there were some analysts who said more cuts were in the pipeline.
“As such, we expect the authority to inject additional interbank funding via open market operations and the medium-term lending facility in the near term. These will likely take place towards the end of February when delayed tax payments are due. Through 2020, we expect the one-year LPR to fall by a cumulative 60bps and expect a 300bps reduction in banks’ required reserve ratio. The resultant liquidity injections should help to spur credit expansion,” said DBS strategist Nathan Chow, who now expects the general budget deficit target to widen from 2.8% of GDP in 2019 to 3% this year.
“This marks a shift in gears from its previous focus on reining in debt to promoting growth.”
