China tipped to start rate cutting ‘road map’ as early as next week, as economic slowdown deepens
- Beijing wants businesses and consumers spend more and save less, with consumption growth remaining anaemic in the world’s second largest economy
- Analysts expect China to gradually slash lending rates to join global monetary easing led by Federal Reserve and European Central Bank
As pressure builds on China’s central bank to contain the impacts of the ongoing US trade war and a broad-based economic slowdown, analysts are tipping it to start an extended cycle of interest rate cuts as early as next week, through its new Loan Prime Rate system.
This would bring the People’s Bank of China (PBOC) into line with a global monetary easing cycle led by the US Federal Reserve and the European Central Bank and follows the PBOC’s decision on Friday to pump 900 billion yuan (US$126 billion) into the banking system to boost lending.
Its next policy step is now expected to be an interest-rate cut later this month, with the bottom line being that Beijing wants businesses and consumers spend more and save less, with consumption growth remaining anaemic in the world’s second largest economy.
“There is room for policy rates to be cut and it is necessary to do so given central banks worldwide have restarted monetary easing,” said Wen Bin, chief macro analyst at China Minsheng Bank, who expects a 10 basis point cut of China’s medium-term lending facility (MLF) rate on September 17.
Analysts’ expectations that the Federal Reserve will cut its official rates next week, along with the widespread view that the European Central Bank will cut its interest rates and possibly restart quantitative easing at its next meeting on Thursday, also open the door for the PBOC to start cutting Chinese interest rates.
On Monday, a front-page commentary in China Securities Journal , a state-owned financial newspaper, said that the central bank now had a “road map” for China’s interest rate trajectory, in which lending interest rates would be lowered through “multiple small-scale cuts” using the Loan Prime Rate (LPR), which was launched in July.
“The interest rate anchor in China has changed under the new system. Lowering the MLF to lower the LPR, in essence, will achieve the same effects as cutting [the PBOC’s official] benchmark rates,” the newspaper said.
The first opportunity for the PBOC to cut the LPR is September 17, when 265 billion yuan (US$37 billion) of MLF loans will mature, the day before the expected 25 basis point rate cut by the Federal Reserve, it added.
When the central bank unveiled the new LPR last month, the one-year benchmark was set at 4.25 per cent, a cut of 10 basis points from the one-year lending benchmark rate 4.35 per cent. The central bank has told all banks to use the LPR as the base for setting rates in new loan contracts and aims to have the LPR cover 30 per cent of all new loans by the end of September and 50 per cent by the end of this year.
The new rate regime, by design, would offer China’s central bank more flexibility and autonomy in setting interest rates.
Yi Gang, China’s central bank governor, has not touched the government-set benchmark borrowing and lending rates since he became the governor in March 2018, despite the Federal Reserve changing its interest rate five times, most recently a 25 basis point cut at the end of July.
The central bank was able to influence interest rates in the interbank market, but these changes often made little impact on actual bank lending. In effect the system was “clogging” the flow of money into the real economy.
Zhang Jun, chief economist at Morgan Stanley Huaxin Securities, said the reserve ratio cut was part of government efforts to boost infrastructure spend, which grew by a weak 3.8 per cent between January and July.
