China to tread warily on easing as concerns over impact on banks mount
- Further lending rate, reserve ratio cuts in second half of 2023 likely but room for rate cuts limited amid worries about yuan, banking sector impact
- Impact on loan demand likely to be limited due to balance sheet recession with greater reliance on fiscal stimulus, other policies to spur demand
China’s central bank is likely to cut lending rates further in a bid to revive the economy but reluctance among private firms and households to borrow means continued policy easing could end up hurting banks already battling margin pressures, analysts said.
Small cuts in rates will not have a big impact on demand for loans as families and businesses repair balance sheets damaged by Covid-19 and repay debts, economists said, forcing Beijing to rely on fiscal stimulus and other policy tools to spur demand.
The People’s Bank of China (PBOC) cut its benchmark loan prime rates (LPR) for the first time in 10 months on Tuesday, with a smaller-than-expected 10-basis point reduction in the five-year LPR, which influences the pricing of mortgages.
Most economists expect another modest 10 bps LPR cut in the second half – on top of a 25 basis points cut in banks’ requirement ratio (RRR). The PBOC last cut the RRR – the amount of cash that banks must hold as reserves – in March, by 25 basis points.
To help create room for lending rate cuts, Beijing will have to let banks lower rates on deposits, a key source of funding for the lenders, with their net interest margins – a key gauge of profitability – at record lows.
Chinese banks’ net interest margin (NIM) shrank sharply from 1.91 per cent at the end of last year to 1.74 per cent last quarter.
“It is possible to see further LPR cuts in the second half of this year … That will again bring cost pressure on banks,” said Wang Yifeng, a banking sector analyst at Everbright Securities.