China: Lending rate reform – Westpac

According to Westpac analysts, China is shifting its focus further on to supporting growth via a combination of policies, preparing for a no-trade-deal scenario.

Key Quotes

“FX adjustment alone is not enough given high tariff rates. A number of fiscal and monetary policies have been put forward to support growth.”

“The PBoC reformed the formation mechanism for its Loan Prime Rate (LPR), the rate which banks make reference to when they grant loans to customers. LPR quotations are now made with reference to open market operation rates – mainly the 1- year Medium-Term Lending Facility (MLF) rate. The first LPR based on this new mechanism came in at 4.25%, representing a timid 6bp cut from the long-lend 4.31%.”

“Going forward, if the PBoC adjusts OMO rates – in particular the MLF rate – the transmission will be more effective. This may precisely increase the incentive for the PBoC to adjust the MLF rates.”

“The PBoC is likely to maintain an easing bias. We expect a potential 5-10bp cut in the 1-year MLF rate; we have also pencilled in a 50bp RRR cut each in Q3 and Q4. We note that by shifting liquidity provisions from being via one facility to another (for example from MLF to a lower RRR) can effectively cut funding costs as well.”