China kept its lending benchmark rate unchanged on Friday, but markets widely expect further monetary easing in 2020 to arrest an economic slowdown in the world's second-largest economy. Premier Li Keqiang said this week the economy could face even bigger downward pressure next year, confronted by slowing demand and as US trade tariffs continue to hurt manufacturers. China's economic growth slowed to near 30-year lows in the third quarter and speculation is mounting that Beijing needs to roll out stimulus more quickly and more aggressively.
The one-year loan prime rate (LPR) was unchanged at 4.15% from the previous monthly fixing. The five-year LPR also remained the same at 4.80%. A Reuters snap survey published on Thursday showed that near 74% of all 53 participants predicted no change to the LPR this month.
Governor of the People's Bank of China (PBOC) Yi Gang said earlier this month the authorities should maintain "normal" monetary policy as long as possible since economic growth is still within a reasonable range and inflation is mild overall.
China will not resort to quantitative easing even as the monetary policies of the world's major economies are approaching zero interest rates, Yi wrote in an article published by the leading Communist Party's theoretical journal Qiushi.
The central bank conducted medium-term lending facility operations twice this month, injecting a total of 600 billion yuan ($85.61 billion) into the banking system, exceeding 473.5 billion yuan. The PBOC kept the one-year MLF rate in both operations unchanged at 3.25%. MLF, one of the PBOC's main tools in flexibly managing longer-term liquidity in the banking system, now serves as a guide for the new LPR.
The government has pledged to lower borrowing costs for smaller businesses to support the real economy, but Serena Zhou, economist at Mizuho Securities in Hong Kong argued that cutting LPR may not be a "panacea" for China.
"The average bank lending rate published quarterly by the PBOC remained elevated, up five basis points during the first three quarters this year. This is in sharp contrast to the decline in money market rates during the same period," she said.
"In our view, the widening gap reflects decoupling of bank financing costs and the real economy, highlighting China's urgent need to improve its monetary policy transmission." But she still believes the central bank will continue to adopt a relatively accommodative monetary policy stance next year, and looks for reserve requirement ratio (RRR) cuts of 100 basis points and MLF cuts of 10 basis points.
Cuts to the amount of cash banks must hold in reserves could come as early as January given that a liquidity shortfall of up to 2.8 trillion yuan is expected to emerge during the Lunar New Year holiday, traders and analysts said.
Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore, said Friday's decision to keep the LPR unchanged marks a pause rather than the end of the monetary easing cycle.
"With strains on corporate balance sheets still intensifying and economic activity likely to cool further in the first half of 2020, we think the PBOC will step up the pace of rate cuts before long," he said in a note.
He expects a 50-basis-point reduction in LPR next year. The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August, loosely pegging it to the medium-term lending facility rate.
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