BEIJING/SHANGHAI - Deteriorating Sino-U.S. trade ties and interest rate reforms are fueling speculation China will start cutting key rates from next month, but bankers expect borrowing costs to come down only gradually, offering limited support for the slowing economy.
Still, as the economy cools, analysts say landmark reforms launched last week have paved the way for the first cuts in major China policy rates in four years, with a move seen by mid-September, coinciding with expected easing by the U.S. Federal Reserve. To reduce the pressure on banks, the central bank is expected to first reduce their funding costs by lowering the rate on its medium-term lending facility . That will open the door for a cut in the PBOC’s new benchmark lending rate, the loan prime rate , the next time it is set on Sept. 20.
In what was seen as a symbolic move, the revamped one-year LPR CNYLPR1Y=CFXS was set at 4.25% last week, down 6 basis points from 4.31% previously and 10 bps lower than the existing benchmark one-year lending rate, which will still apply to older loans. The current MLF rate is 3.3%. “The majority of the system should see some negative pressure...with greater pressure on the profitability of the system outside the state banks,” said Jonathan Cornish, head of Asia-Pacific bank ratings with Fitch Ratings.
“There will be winners and losers. Banks’ high-quality clients such as big state-owned enterprises will benefit from lower LPRs, but we don’t see much benefit for small- and medium-sized clients,” said Ting Lu, China economist at Nomura.
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