MLF, reverse repos adjusted; experts expect LPR to fall, credit to pick up

The Chinese central bank's cuts to benchmark interest rates on Tuesday are timely and will stabilize growth and market expectations — and more stimulative measures can be expected to further facilitate economic recovery, experts said.

On Tuesday, the People's Bank of China cut the rate on 401 billion yuan ($55.3 billion) worth of one-year medium-term lending facility from 2.65 percent to 2.5 percent.

The MLF is an instrument with which commercial and policy banks can borrow from the central bank using securities as collateral. The adjustment in the MLF interest rate can thus help adjust market liquidity.

The PBOC also cut the interest rate on seven-day reverse repos to 1.8 percent from 1.9 percent while injecting 204 billion yuan into the banking system.

These are the second such cuts to benchmark rates this year; the first ones were effected in June.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said that exports' negative reading in July, the sluggish property market, and weaker consumption and investment data all require stronger policies to stabilize growth.

The weaker financial data in July showed that financing demand among market entities is insufficient. So, the cost of credit for companies and households should be lowered, said Wang.

Data in the public domain showed that the increment in aggregate financing to the real economy was 528.2 billion yuan in July, lower than both market expectations of 1.1 trillion yuan and the 778.5 billion yuan recorded in July 2022.

The relatively lower price level in China has indicated room for further monetary policy maneuvers, said Wang.

On Tuesday, the National Bureau of Statistics said the Consumer Price Index contracted 0.3 percent year-on-year in July.

Meanwhile, the PBOC also announced it will lower the borrowing costs of standing lending facility by 10 basis points across all tenors. SLF is a type of loan that the PBOC extends to commercial banks to meet their need for temporary cash.

Following the latest cut to the MLF rate, the loan prime rates, the market-based lending rate benchmarks, are expected to be lowered this month. The one-year LPR may be lowered by 10 bps and the five-year LPR by 15 bps, said Wen Bin, chief economist at China Minsheng Bank.

Following the PBOC's cuts to benchmark rates, the offshore renminbi exchange rate fell to 7.31 per US dollar on Tuesday morning, the lowest level reached since November.

Zhou Ji, a macroeconomy and foreign exchange analyst at Nanhua Futures, said the stronger US dollar and China's weaker-than-expected macroeconomic data in July have weighed on the RMB's valuation.

But Wen of Minsheng Bank said the Chinese regulators still have enough tools in their bag to stabilize the renminbi. In this context, the foreign exchange reserve requirement ratio and the forward foreign exchange sales risk reserve ratio may be used.

Agreed Yang Yiping, macroeconomic researcher at Galaxy Futures. The PBOC, he said, may raise commercial banks' forward foreign exchange sales risk reserve ratio to increase the costs and lower demand, which will improve the supply-and-demand equation in the onshore foreign exchange market.

Yang said he believes there is room to further lower commercial banks' foreign exchange reserve requirement ratio. The ratio was cut to 6 percent in mid-September last year; its lowest level was 3 percent in 2005, which means there is room for further adjustment.

According to Ming Ming, chief economist of CITIC Securities, the reserve requirement ratio is likely to be lowered in the third quarter to inject more medium- to long-term liquidity into the market. Given that there is still room for further lowering the loan interest rates and financing costs for the real economy, the policy rate may be allowed to fall further in the range of 10 to 30 bps.

It is also probable that the central bank will increase the quota of structural monetary policy tools or even come up with new tools so that precise financial support can be provided to the real economy. The PBOC may advance the adjustment to existing mortgage loans so that people would be willing to lower their household leverage rate, he said.

Wang Tao, chief China economist of UBS Investment Bank, said local governments' special bonds are likely to be issued at a faster pace in the rest of this year. Policy banks may raise and use new special infrastructure funds to boost investment in the public sector, she said.