PBOC cuts rates to boost growth

Move comes amid stepped-up efforts to consolidate recovery, hike confidence

China's central bank cut its short-term lending rate, the first such move since August 2022, as the country stepped up measures to consolidate economic recovery and restore market confidence amid downward pressure, analysts said on Tuesday.

Thanks to Tuesday's policy interest rate cut, the country's key benchmark lending rates for medium-term lending facility operations and loan prime rates are likely to see reductions over the following days, which will help prop up credit demand and boost investor sentiment.

The People's Bank of China lowered interest rates for seven-day reverse repurchase agreements to 1.9 percent from 2 percent on Tuesday, after it injected 2 billion yuan ($279.73 million) via the short-term liquidity instrument.

"This means the PBOC will almost surely deliver a 10 basis point, one-year MLF rate cut on June 15 and a similarly sized cut to the LPR on June 20," said Lu Ting, chief China economist at Nomura.

Meanwhile, Lu said his team believes the impact of a moderate cut to benchmark lending rates will be quite small, and the country still has to do more over the rest of this year.

"We expect Beijing to ramp up transfers to local governments via an increase in the quota for special local government bonds, more lending quotas for policy banks and some direct funding from the PBOC," Lu said.

"To some extent, for the rest of this year, we expect Beijing to redeploy many of the financial tools that it used last year to maintain the functioning of local governments, bolster aggregate demand and eventually deliver on its 'around 5 percent' (annual) GDP growth target."

Lu's views were echoed by Yao Wei, chief economist and head of research for Asia-Pacific at Societe Generale, who expects to see reductions in MLF and LPR interest rates in the following days.

"This move is probably not going to be the last and we actually expect more rate cuts to come. These are pretty critical in stabilizing the housing market and industrial sector in the second half," Yao said.

Given factors including continued normalization of services, Yao said the recovery will likely pick up pace a little bit toward the end of the year, with an estimated full-year growth rate of 5.5 percent for 2023, higher than the country's preset annual growth target of around 5 percent.

Central bank data showed on Tuesday that China's new yuan-denominated loans totaled 1.22 trillion yuan in May, down by 617.3 billion yuan year-on-year, while China's broad money supply, or M2, stood at 282.05 trillion yuan by the end of May, up 11.6 percent from a year earlier.

The country's increment in aggregate social financing — the total amount of financing to the real economy — came in at 1.56 trillion yuan in May, down by 1.31 trillion yuan compared with the same period last year, the PBOC said.

Zhou Maohua, an analyst at China Everbright Bank, said the latest credit data came in below market expectations with a still-weak domestic demand, saying more stimulus policies may be needed to consolidate the recovery trend.

The National Development and Reform Commission and three other central departments on Tuesday released a new document on reducing costs for companies to boost the real economy.

The document urged the financial sector to better serve the real economy, saying efforts will be made to promote declines in lending rates and business entities' financing costs while keeping them stable overall.

Yang Haiping, general manager of the Bank of Inner Mongolia's research and development department, said the LPR rate cut will to some extent help unleash consumption demand, boost investment and mitigate debt risks in some key fields.

Lou Feipeng, a researcher at Postal Savings Bank of China, said China still has ample space to step up macroeconomic policy support, and more monetary and fiscal stimulus measures to boost demand and shore up growth are expected going forward.