Measures effective in reducing banks' funding cost; more policy tools likely

Loan prime rates, the market-based benchmark lending rates of China, could decline in the second quarter of the year and ease the financing burden in the real economy thanks to a series of measures to reduce the funding costs of banks, market experts said.

They made those remarks after the People's Bank of China, the nation's central bank, announced a cut in the reserve requirement ratio on Friday that will save financial institutions about 6.5 billion yuan ($1.02 billion) annually in funding costs.

In a further bid to trim those costs, a self-regulating body of the banking industry has reportedly encouraged smaller banks to lower deposit rates as well.

With the costs of funds trimmed, banks will be able to offer loans at lower rates, a trend that could bring down the loan prime rates, or LPRs, which are calculated based on the lending rates quoted by banks to their highest quality customers, the experts said.

"The RRR cut and the call on reducing deposit rates are both conducive to lowering lending rates. It has become possible for the LPRs to decrease in April or May," said Cheng Qiang, chief macroeconomic analyst at CITIC Securities.

The PBOC announced on Friday it would cut the RRR, the proportion of money that lenders must hold as reserves, by 25 basis points on April 25 for all banks with an RRR above 5 percent.

Media reports on Friday said the self-disciplinary mechanism for the pricing of market interest rates had encouraged small and medium-sized banks to reduce their ceilings on deposit rates by about 10 basis points.

More measures to pare the banks' funding costs can be expected going forward.

Sun Guofeng, head of the PBOC's monetary policy department, said on Thursday the central bank will launch two re-lending facilities at an early date to provide banks with low-cost funding to support their loans to technological innovation outfits and elderly care services.

Sun added the central bank will give play to potential of LPR reforms to reduce corporate financing costs.

Li Siqi, a macroeconomic analyst at Soochow Securities, said recent policy signals reflect the PBOC's tendency to trim corporate lending costs by providing low-cost funding to financial institutions rather than cutting policy interest rates directly, as room for the latter has been narrowed by tightening measures of overseas central banks.

The PBOC kept the interest rate of medium-term lending facilities, a key policy interest rate, unchanged at 2.85 percent on Friday for the third consecutive month.

Li said the one-year LPR, due to be unveiled on Wednesday, could drop by 5 basis points to 3.65 percent while the over-five-year LPR has the potential to drop 5 basis points to 4.55 percent.

The PBOC's supportive measures appear part of the nation's efforts to cushion the economic headwinds from external uncertainties and given a resurgence in domestic COVID-19 cases.

Liao Min, deputy head of the Office of the Central Committee for Financial and Economic Affairs and vice-minister of finance, said China is pushing various policy measures in full according to the requirements of launching support ahead of schedule and adopting targeted measures.

Currently, China is looking to reduce and avoid the launch of policy measures that have a significant economic contraction impact and make greater efforts to protect market players, stabilize employment and safeguard people's livelihood, Liao said at the 2022 Tsinghua PBCSF Global Finance Forum on Saturday.

He urged financial institutions to adapt to the deep transition of the Chinese economy from being investment- and export-driven to one that is consumption- and technology-driven, provide financial products and services accordingly, and enhance the efficiency of resource allocation.