China needs bigger rate cuts beyond latest small move to support economy, analysts say
- The People’s Bank of China cut the medium-term lending facility rate by 5 basis points on Tuesday, the first reduction in more than three and a half years
- The move could mark the beginning of a series of rate cuts to avert a further slowdown in the economy, analysts say
China’s central bank on Tuesday made a modest cut in the key medium-term lending facility rate for the first time since 2016, but analysts say more needs to be done to support the country's slowing economy.
Analysts said further rate cuts and liquidity injections from the People’s Bank of China (PBOC) were required in the near term to help support growth, but there is uncertainty on how far and fast bank officials will ease monetary conditions.
The cental bank doled out 400 billion yuan (US$56.9 billion) in new MLF loans Tuesday, essentially rolling over the 403.5 billion yuan (US$57.3 billion) in loans expiring the same day.
With economic activity likely to come under further pressure in the months ahead, we think more easing will be needed to prevent growth from slowing too sharply
Julian Evans-Pritchard, a senior China economist of Capital Economics, said Tuesday’s move could mark the beginning of a series of PBOC rate cuts and another 70 basis points of reductions in the MLF rate may be needed by the middle of next year.
“A five basis point decline in the MLF rate and LPR [Loan Prime Rate] won’t be enough to drive a turnaround in credit growth, which has started slowing again recently. With economic activity likely to come under further pressure in the months ahead, we think more easing will be needed to prevent growth from slowing too sharply,” he wrote in a note.
The lower MLF rate is expected to allow banks to reduce the interest rates they charge customers. This, in turn, could result in a decline in the LPR, the benchmark interest that 18 selected banks can charge their best customers. The LPR, which serves as a reference point for most other lending rates in China, has been cut by 11 basis points in the past two months and is expected to drop further on November 20 when the new rate is calculated.
Tuesday’s central bank cut follows a decision by the US Federal Reserve last Wednesday to lower its benchmark lending rate by 25 basis points for the third time this year.
Policymakers have shown more concern about the downward economic risks. There’s no sign of a turnaround
Analysts said the MLF rate cut suggested Beijing was concerned about China’s economic outlook.
“Policymakers have shown more concern about the downward economic risks. There’s no sign of a turnaround,” said Ding Shuang, chief Greater China economist of Standard Chartered Bank.
Ding said the adjustment to the MLF may be a result of increased pressure from other government agencies on the central bank to do more after the Ministry of Finance rolled out 2 trillion yuan (US$284.3 billion) tax cut this year, a move that is not expected again next year.
China’s central bank had avoided a cut in policy rates for fear it could be misinterpreted as a sign it was embarking on strong stimulus measures that have fuelled the country’s current debt problem. Instead, it pledged to lower the market rates through sufficient liquidity injections and the newly introduced loan prime rate LPR regime.
The central bank is likely to continue liquidity injections and cut banks’ required reserve ratios – the amount of reserves they are required to maintain at the central bank – in the current quarter, with another MLF rate cut possible in the first quarter next year, Ding said.
China’s economy will need to grow by at least 6.2 per cent this year and next to meet the government’s target of doubling the size of the economy between 2010 and 2020. But some observers see that as increasingly unlikely.
“We see sub-6 per cent real GDP growth in the fourth quarter, due to the filtering-through of the impact of the September tariff hike and subdued consumption,” said analysts from Morgan Stanley led by Chinese economist Robin Xing.
The economists predicted policymakers would continue with defensive easing, including continued front loading of the local government bond issuance limit this year from next to ensure financing is available for local infrastructure projects.
