Thought December 20, 2019 / 03:15 am UTC

PBoC Takes Comfort from Trade Deal, Data Rebound

By Siew Huay Liang, Charu Chanana

The People's Bank of China (PBoC) kept loan prime rates steady on December 20, amid signs of relief from the phase 1 U.S./China trade deal and some rebound in activity data for November. Although more easing still remains likely for 2020, we expect the PBoC to continue to refrain from aggressive loosening for fears of fuelling financial risks. 

The PBoC left the loan prime rates (LPR) unchanged on December 20, as expected. The one-year LPR remained steady at 4.15%, while the five-year LPR stayed at 4.80%. The last cuts were in November, when both rates were lowered by 5bps each to their current levels.

While the PBoC has eased monetary policy slightly in recent months to support the slowing economy—including a surprise 14-day reverse repo rate cut from 2.70% to 2.65% on 18 December, it has refrained from aggressive loosening for fears of fuelling financial risks and to stem rising debts.

Following latest strong industrial production and retail data for November, which signalled some stabilization of activity at home, there is now less pressure for bigger rate cuts in our view. The signing of the phase-one trade deal with the U.S., meanwhile, may help to relieve some pressures on the exports front with the December tariffs called off. More relief can be expected going into 2020 particularly if existing tariffs were also rolled back. We watch for the details of the phase 1 trade deal, due in January. 

Should growth slow more than expected or if U.S./China relations take a turn for the worse again next year (which is not our base case), the Central Bank still has some leeway for monetary fine-tuning including lower reserve requirement ratios and open market operations.

Further rate cuts will likely remain small as sizable reductions may also fuel property speculation, raise inflationary expectations and affect banks’ profitability.

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I, Siew Huay Liang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.