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Rate cuts hold key to recovery

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China needs further monetary accommodation to reinforce the recent signs of a recovery in demand, with more interest rate cuts needed in order to ease corporate financing burdens and household mortgage costs, political advisers and experts said.

They commented after a faster-than-expected credit expansion signaled a nascent recovery in the nation’s financing demand. Both China’s new yuan loans and total financing to the real economy in January hit all-time highs of 4.92 trillion yuan ($683.9 billion) and 6.5 trillion yuan respectively, according to the People’s Bank of China, the country’s central bank.

However, other indicators showed a lingering weakness in demand. The growth in the consumer price index, a main gauge of inflation, stood at -0.8 percent year-on-year in January, staying in negative territory for four consecutive months — the first time since 2009, the National Bureau of Statistics said.

The manufacturing sector contracted for the fourth month in a row as the sector’s official purchasing managers index came in at 49.2 in January, below the 50-mark that separates expansion from contraction, the NBS said.

Ming Ming, chief economist at CITIC Securities, said the mixed figures show that the foundation for economic recovery remains unstable. “There is no basis for monetary policy to shift toward tightening.”

Zhang Bin, a senior researcher at the China Finance 40 Forum think tank and a member of the 14th National Committee of the Chinese People’s Political Consultative Conference, the country’s top political advisory body, said insufficient demand remains the top challenge facing the Chinese economy.

To boost financing demand, Zhang said it is necessary to significantly reduce policy benchmark rates to bring down real interest rates.

Data from the PBOC shows that China’s weighted average interest rate of new corporate loans hit a new low of 3.75 percent in December.

“It’s essential to amplify policy support for the capital market and consumer spending, and interest rate cuts should be considered as an important tool,” said Gong Liutang, a professor of applied economics at Peking University’s Guanghua School of Management and a member of the 14th CPPCC National Committee.

“Household income growth is anaemic while the wealth effect -whereby consumers spend more when the value of their assets like houses or stocks goes up — is diminishing. These have combined to weigh on consumption and the broader economy.”

Demonstrating strengthened policy support, the PBOC cut the reserve requirement ratio — the proportion of money that lenders must keep as reserves — on Feb 5 by 0.5 percentage points and released 1 trillion yuan in long-term liquidity.

However, it skipped a widely anticipated cut in the medium-term lending facility rate or MLF rate — a key benchmark rate — last month. Instead, it implemented a targeted, cautious cut to policy benchmark rates for the agriculture sector and small enterprises.

Experts close to the PBOC said the factors weighing against broad-based interest rates cuts include the elevated US-China interest rate differential and commercial banks’ narrowing profit margins.

Zhang, from the China Finance 40 Forum think tank, said the benefits of interest rate cuts should outweigh any negative impact. “As long as the economy is doing well, even if there are pressures in the financial sector, they can be resolved more easily.”

The PBOC said in its fourth-quarter monetary policy report that it will deepen market-oriented reforms of interest rate formation and promote a decline in social financial costs while maintaining their overall stability.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said loan prime rates or LPRs — key market-oriented lending rate benchmarks — may decrease even if the MLF rate remains stable, while mortgage rates are likely to substantially decrease this year in order to stimulate property market recovery. China is expected to unveil its latest LPR figures on Tuesday.

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