China likely to keep benchmark lending rate unchanged in July
A slew of economic data, including Q2 GDP and June activity indicators, showed that China’s economic recovery might have peaked, suggesting more easing was still needed
China will likely keep its benchmark lending rate unchanged at its July fixing today (Tuesday), a small majority of respondents to a Reuters survey believe, but there are growing expectations for a cut ater a surprise lowering of bank reserve requirements.
Eleven traders and analysts, or 52.4 per cent of 21 participants, in the snap poll predicted no change in either the one-year Loan Prime Rate (LPR) or the five-year tenor.
The remaining 10 respondents expect a cut to the one-year LPR. Nine participants forecast a marginal cut of 5 basis points, and one sees a 10 bp reduction.
The one-year LPR was last at 3.85 per cent, and the five-year rate stood at 4.65 per cent.
The mixed expectations come ater China’s central bank lowered the amount of cash that banks must hold as reserves, releasing around 1 trillion yuan ($154.35 billion) in long-term liquidity to underpin its POST-COVID economic recovery that was starting to lose momentum.
However, the People’s Bank of China (PBOC) kept borrowing costs of medium-term lending facility (MLF), which serves as a guide for the LPR, unchanged at its latest operation last week, when it partially rolled over maturing loans.
“Although the PBOC recognises that downward pressure on growth is likely to rise in H2, it has been quite determined in containing financing for the property sector, which is a key signature of Beijing’s ‘dual circulation’ strategy,” said Lu Ting, chief China economist at Nomura. Lu expects the LPR will likely remain unchanged this month.
A slew of economic data including second quarter GDP and June activity indicators showed that China’s economic recovery might have peaked, suggesting more easing was still needed.
China’s economy grew slightly more slowly than expected in the second quarter, weighed down by higher raw material costs and new COVID-19 outbreaks, as expectations build that policymakers may have to do more to support the recovery.
“The 1Y LPR is likely to fall by 5 bps on July 20 and another 5 bps before year-end due to RRR cuts and reduced interest rate ceilings for term deposits longer than one year,” Li Wei, senior China economist at Standard Chartered, said in a note.
The LPR is a lending reference rate set monthly by 18 banks. All 21 responses in the survey were collected from selected participants on a private messaging plaform.
Meanwhile the China’s blue-chip stock index ended higher on Monday, recouping earlier losses, boosted by healthcare and consumer firms and inflows through the Stock Connect scheme.
At the close, the blue-chip CSI300 index was up 0.37 per cent ater falling as much as 0.93 per cent.
The Shanghai Composite index was litlechanged at 3,539.12.
Healthcare firms were the biggest boost to the CSI300, with a sub-index tracking the sector up 2.27 per cent on the day.
The consumer staples sector gained 0.3 per cent, and the consumer discretionary index rose 1.32 per cent.
Foreign investors were net buyers, with Refinitiv data showing inflows of 7.74 billion yuan ($1.19 billion) into Chinese A-shares through the Northbound leg of the Stock Connect scheme through Hong Kong.
The smaller Shenzhen index ended down 0.18 per cent and the start-up board Chinext Composite index rose 0.49 per cent.
Around the region, MSCI’S Asia ex-japan stock index was 1.28 per cent weaker, while
Japan’s Nikkei index ended down 1.25 per cent.
At 07:02, the yuan was quoted at 6.4829 per US dollar, 0.07 per cent weaker than the previous close of 6.4786. The currency hit a 10-day low against the dollar on Monday as investors await the monthly fixing of China’s benchmark loan prime rate fixing.
So far this year, the Shanghai stock index is up 1.9 per cent and the CSI300 has fallen 1.9 per cent, while China’s H- share index listed in Hong Kong is down 7.1 per cent. Shanghai stocks have declined 1.45 per cent this month.
Chinese steel futures were range-bound on Monday amid concerns of supply crunch as top steel producer China stepped up production curbs, while Beijing vowed to continue monitor commodity market had put a lid on prices.
Capacity utilisation rates of blast furnaces at 163 steel mills across China fell to 76.81 per cent, as of July 16, from 77.61 per cent the week earlier, data from Mysteel consultancy showed. That compared with 85.6 per cent in the same period a year earlier.
“Currently, the biggest variate to affect steel prices is crude steel output control policy, which is gradually being implemented and widened,” analysts with Huatai Futures wrote in a note.