FILE PHOTO: Headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee/File Photo
July 17, 2020
SHANGHAI (Reuters) – China is expected to keep its benchmark lending rate steady for the third straight month at its July fixing on Monday, a Reuters survey showed, encouraged by a stronger-than-expected rebound from the coronavirus crisis.
Thirty-four traders and analysts out of 36 participants in the snap survey this week predicted no change to the one-year Loan Prime Rate (LPR) <CNYLPR1Y=CFXS> or the five-year tenor <CNYLPR5Y=CFXS>.
The remaining two expected a marginal reduction of five basis points (bps) in both tenors.
The one-year LPR is now 3.85% after two cuts this year, while the five-year rate is at 4.65%.
The overwhelmingly strong expectations for a steady fixing came as the People’s Bank of China (PBOC) kept borrowing costs on the medium-term lending facility (MLF) unchanged this week.
The MLF is one of the PBOC’s main tools in managing longer-term liquidity in the banking system, and serves as a guide for the LPR. The interest rate on one-year MLF loans has been kept steady for three months.
Data on Thursday showed China’s economy grew 3.2% in the second-quarter from a year earlier, faster than the 2.5% expected by analysts, as lockdown measures ended and policymakers ramped up stimulus after a record, virus-induced contraction early in the year.
But it was still the smallest expansion on record, and analysts said unexpected weakness in domestic consumption underscored the need for further support to keep the recovery on track.
Analysts say policymakers, encouraged by signs of momentum, are now likely to shift away from broader-based emergency measures to more specific schemes to help areas of the economy that are still struggling.
“For the central bank, this implies a much lower probability of cutting RRR (banks’ reserve requirements) or interest rates in the near future,” analysts at BofA said in a note to clients on Friday, saying they do not expect the LPR to be lowered again before the end of 2021.
Analysts said policymakers are also wary that overly aggressive easing could spur speculative activity.
“The authorities may turn their eyes to regulatory tightening with regard to credit that been illicitly channelled into the stock market and the real estate sector,” said Jacqueline Rong, senior China economist at BNP Paribas in Beijing.
The LPR is a lending reference rate set monthly by 18 banks.
All 36 responses in the survey were collected from selected participants on a private messaging platform.
(Reporting by Reuters Fixed Income Team; Writing by Winni Zhou; Editing by Kim Coghill)
