Unchanged LPR signals more aid for economy

With the People's Bank of China, the country's central bank, surprising the market to some extent on Wednesday by keeping the loan prime rate, a market-based benchmark lending rate, unchanged, the country's monetary policy will continue to increase its support for the real economy in a stable manner, experts said.

The PBOC announced on Wednesday that the one-year LPR was kept at 3.7 percent and the five-year LPR at 4.6 percent.

Reviewed on a monthly basis for any possible adjustment, both LPRs remained unchanged for the third consecutive month.

Under the new formation mechanism announced in August 2019, the LPR is quoted according to the latest medium-term lending facility rate with extra points. The LPR serves as a benchmark interest rate for corporate and household loans.

Lu Zhe, chief macroeconomist of Topsperity Securities, said there are two premises for LPR cuts, based on past experience. One possible way is to maneuver the medium-term lending facility to lead a cut in the LPR.

An LPR cut can also be realized by lowering commercial banks' capital costs after an overall cut in the reserve requirement ratio, or the portion of deposits that lenders should hold in reserves.

The LPR will be lowered under a 100 basis points RRR cut, said Lu. Over the past three months, the central bank announced only one RRR cut of 25 basis points on Friday. Although the PBOC has submitted 600 billion yuan ($94 billion) to the central budget by mid-April, which is equal to the effect of an RRR cut of 25 basis points, the combined influence of the two measures is still not enough to trigger an LPR cut, he said.

Looking ahead, the one-year LPR may be moderately lowered in May even if the open market interest rate remains unchanged, said Shen Xinfeng, chief macroeconomic analyst at Northeast Securities.

As monetary tightening will be accelerated in the overseas markets in the next few months, China will be mostly facing the pressure to stabilize foreign exchange rates and avoid capital outflows. Although the Chinese yuan is experiencing mild depreciation pressure at present, no significant capital outflow will be expected in the near term. Therefore, the central regulators should seize the best time window to use the right pricing tools, said Shen.

Although no change has been made to the LPR, the central regulators' dedication to supporting the real economy with various financial tools has been quite evident, said Wen Bin, chief analyst at China Minsheng Bank.

According to the PBOC, the corporate lending rate was lowered by 0.21 percentage point year-on-year to 4.4 percent in the first quarter, a record low. Structural tools such as the relending facility have been better utilized. A 100 billion yuan relending facility was announced on Monday to support the transportation and logistics sector. Another 200 billion yuan relending facility will be issued to boost technological innovation.

While China's monetary policy will remain generally stable this year, it will be more guided to stabilize economic growth by giving equal importance to both quantity and structural tools. Lending rates are expected to be steadily lowered in the next few months, with more attention directed to industries as well as micro and small enterprises hit hard by the COVID-19 pandemic, said Wen.

Zhong Zhengsheng, chief economist at Ping An Securities, said monetary policy adjustments should aim to create a relaxed credit environment. More measures should be taken to lower companies' overall financing costs, he said.

Zhong also suggested that structural monetary tools should be applied at a faster pace to support the development of manufacturing and green sectors. The key areas in the property market should be better supported.