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China’s Lower Loan Rate Lacks Punch for Liquidity-Hooked Markets

Tian Chen and Livia Yap
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China’s Lower Loan Rate Lacks Punch for Liquidity-Hooked Markets

(Bloomberg) -- Analysts called for stronger easing signals from Beijing after a new gauge of borrowing costs was only slightly lowered Friday.

The one-year reference rate for bank loans was set at 4.2% for September versus 4.25% in August, according to a statement from the central bank. That’s in line with the median estimate compiled by Bloomberg. The five-year tenor was kept at 4.85%. The Shanghai Composite Index added just 0.2% while the yield on 10-year government bonds rose by one basis point to 3.12% as of 10:33 a.m. local time.

China traders were disappointed by a lack of policy rate cuts from the People’s Bank of China earlier this week after data showed economic growth continues to slow. Stocks, bonds and the currency tumbled when costs on medium-term loans were kept steady Tuesday. The central bank also held money market rates unchanged on Thursday.

“The mildly lower LPR suggests Chinese policy makers don’t want to disappoint the market again like it did on Tuesday, but also that they don’t intend to send a strong easing signal,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “Authorities may need to step up its fiscal stimulus if growth slows further in the fourth quarter.”

While the PBOC has tweaked policies in recent months to support the slowdown, it has refrained from more aggressive stimulus out of concern over financial stability and high debt levels. China releases its revamped loan prime rates on the 20th day of every month.

“The LPR cut is not enough to soothe the market and also not enough to counter weak growth,” said Iris Pang, an economist at ING Bank NV. “Both fiscal and monetary policies have to work together to maintain growth at 6% in 2019. I’m still looking for more fiscal stimulus.”

With central banks around the world turning increasingly dovish, the PBOC’s calibrated approach stands out as Beijing seeks to prevent a bubble in the property market and to curb leverage in the financial industry. Its reluctance to cut rates has capped a bond rally, as the 10-year sovereign yield trades within its narrowest range in seven years.

What Bloomberg’s Economists Say..

In our view, a series of small tweaks in rates is a more practical way for the authorities to achieve a balance between stabilizing the economy and minimizing further accumulation of financial risks, such as debt buildup and asset price bubbles. This is also reflected in Friday’s steady five-year LPR, which is the base rate for mortgage loans.-- David Qu, Bloomberg EconomicsFor the full note click here

The LPR is a revamped market indicator of the price that banks charge clients for loans, and is linked to the rate at which the PBOC will lend financial institutions cash for a year. It’s made up of submissions from a panel of 18 banks, though the central bank has a role in setting the level.

The reserve ratio cut that took effect this week released 800 billion yuan ($113 billion) into the financial system. The move -- together with two more narrower cuts planned in the next two months -- will lower lenders’ annual funding costs by 15 billion yuan, according to the PBOC.

Why China’s Starting to Shake Up Its Interest Rates

Investors may grow even more hopeful for monetary easing after Friday, betting on the PBOC cutting interest rates to pave the way for lower LPR in the future, said Zhaopeng Xing, a markets economist at Australia & New Zealand Banking Group Ltd.

“The cut is in line with the market expectation, but it’s not sufficient to encourage loan demand,” said Xing, adding that he believes the PBOC would want the LPR at 3.9% by the end of the year.

Chi Lo, a senior economist at BNP Paribas Asset Management, isn’t expecting any swift moves from the PBOC as its aim is to keep increasing liquidity in the system, but at a moderate pace.

“Beijing’s game plan is to have a controlled process of selective easing. It’s just sticking with its rule book. Right or wrong, it’s the way it is,” he said.

--With assistance from Xize Kang, Heng Xie, Yinan Zhao and Claire Che.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Livia Yap in Shanghai at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Magdalene Fung, Jeffrey Black

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