Rate cuts, state funds for Chinas trade-in scheme as Beijing moves on a path to easing

The central bank said it had issued 200 billion yuan (US$27.5 billion) in one-year loans under its MLF on Thursday, while also injecting 235.1 billion yuan into the market through the seven-day reverse repo process.

After breaking the cycle of traditionally adjusting MLF rates on the 15th of each month, Julian Evans-Pritchard, head of China economics at Capital Economics, said the underwhelming market response to the third plenum and Monday’s rate cuts had pushed the central bank “to act with greater urgency”.

“This would also explain why they decided to step up the scale of cuts and also why they appear to have coordinated the concurrent announcement of deposit rate reductions among the major state banks,” he said.

Earlier on Thursday, China’s five largest state-owned banks had said they would cut deposit rates by between five to 20 basis points, according to statements on their websites.

But Lynn Song, chief economist for Greater China at ING, said while the cuts were still relatively modest in size, they should still be more effective in supporting the economy compared to cuts of the reserve requirement ratio – the amount of cash that commercial banks must hold as reserves.

Real interest rates remain relatively high in China, but the PBOC has refrained from cuts to avoid adding pressure to the yuan, which would exacerbate fund outflows.

“In particular, the MLF continues to see significant usage and it should have a more direct and immediate impact on actual lending rates to the real economy,” Song said.

China’s money and credit data in June also added to concerns over worsening credit demand.

However, the stock markets found little support from Beijing’s latest easing step, with the Shanghai Composite Index closing down by 0.52 per cent on Thursday.

03:14

China’s Communist Party wraps up policy meeting amid growing uncertainties

China’s Communist Party wraps up policy meeting amid growing uncertainties

Hong Kong’s benchmark Hang Seng Index, meanwhile, plunged by 1.77 per cent.

“The larger magnitude of the MLF cut of 20 basis points compared to the recent 10 basis points cut of the loan prime rate (LPR), when combined with the deposit rate cuts announced by the large China banks [on Thursday], also signals that there is likely to be further LPR cuts later this year,” Chang at CGSI Securities added.

On Monday, the one-year LPR was lowered from 3.45 per cent to 3.35 per cent, while the five-year LPR was reduced from 3.95 per cent to 3.85 per cent. The PBOC also trimmed the seven-day reverse repo rate by 10 basis points on Monday.

Reducing deposit rates would help lower funding costs for banks at a time when they are under pressure to support economic growth amid a property crisis, weak loan demand and record low interest margins.

But analysts remain sceptical whether the moves by the PBOC would help channel funds from the banking sector to the real economy amid high risk aversion that has been driving investment into the bond market.

A lack of new fiscal support might mean the broader economy is unlikely to benefit significantly, analysts said.

“Long-term bond yields have remained low as investors continued to seek out low-risk sources of yield amid limited risk appetite; with falling deposit rates and still limited willingness of investors to return to equity or real estate markets, government bonds continue to offer appeal to investors despite the current low yields and signals from the PBOC warning against a bond market bubble,” Song added.

And Michelle Lam, Greater China Economist at Societe Generale, said the MLF operation on Thursday might not make a significant difference to China’s short-term economic outlook.

“It is a move without real punch. What would make more material difference to the near-term growth outlook would be fiscal, and we expect and hope for more,” Lam said.

The requirement for using the treasury bonds to support equipment upgrades for small and medium-sized firms would also be lowered, a joint notice said.

ncG1vNJzZmivp6x7tK%2FMqWWcp51ksqS7zaiksmeVmLyvu8yimmahnpm2pK3TqKmsZ5Gnwaqvy55mbGpnZoR4go6cn6KmkWKwtsDSZqannV2usqK%2BjKmmpaGTrnqzrdOeZKWZpJrAtXnSrZypZaOdvLOxjJ6aqKaforakecCcq6Kumam2pr8%3D