China trims rate, with more cuts to come, says ANZ

November 5, 2019

SHANGHAI - China's 0.5% cut in its medium-term lending facility (MLF) today will likely lead to similar adjustments in the targetted medium-term lending facility (TMLF) rate, the reverse repo rate and the loan prime rate (LPR), according to ANZ Bank, which in a research note says it believes the People's Bank of China (PBoC) will maintain the same spreads as it did in the past two years.

"Today's rate cut is in line with our view on China's deflationary environment," the note says.

"Despite our forecast that CPI inflation will spike above 4% at year-end due to soaring pork prices, PPI fell 1.2% in September and is likely to dip further in October.

"The deflationary risks faced by factories signals a possible recession in China's industrial sectors amid the trade spat with the US.

"As a countercyclical measure, the rate cut will partly offset from a contraction in credit growth since July, and thus help lift the growth outlook in Q4 2019."

ANZ believes the PBoC will continue with its prudent stance, and says the room for further easing will be restrained by the rising debt-to-GDP ratio.

"The overall policy will still adhere to structural deleveraging and debt control in State-owned enterprises, and, consequently, the PBoC will keep liquidity at a reasonable level and encourage banks to fund SMEs and private-owned enterprises," it says.

"At the same time, it will continue to limit accessibility of funds to the real estate and other sectors with excess industrial capacity in order to move on with its supply-side structural reforms. (ATI).