China's People's Bank Emphasizes Interest Rate Cut

The Monetary Policy Report Lists Numerous Side Effects of Interest Rate Cuts Including Inflation
Interpreted as a Monetary Policy Report Leaving Room for LPR, the Benchmark Rate, to be Lowered

[Asia Economy Senior Reporter Cho Young-shin] The People's Bank of China, the central bank of China, emphasized that it will not engage in "d?shu?m?ngu?n (大水漫灌)"?a term referring to massive liquidity injections. Chinese financial authorities have used this phrase repeatedly, as flooding the market with funds could lead to the unexpected challenge of rising inflation.

Photo by Baidu Capture

Nevertheless, the People's Bank of China stated that it will continue to deepen market interest rate reforms. This is interpreted as leaving room for potential interest rate cuts.

On the night of the 16th, the People's Bank of China presented this monetary policy direction through its quarterly monetary policy report. The report summarizes the monetary policy into "sufficient liquidity supply," "continued role of monetary policy tools," "market-oriented interest rate reform," "balance of monetary policy domestically and internationally," and "financial risk management and supervision."

The People's Bank of China first explained that it will continue to deepen market interest rate reforms and fully leverage the important role of the interest rate market adjustment mechanism. It added that this will promote reductions in corporate financing and personal consumption credit costs.

The People's Bank of China also pointed out issues related to debt ratio management in the financial sector that could arise from interest rate cuts.

Furthermore, it declared that it will closely monitor the economic trends and monetary policies of major advanced economies and manage the basic stability of the yuan exchange rate. All the points mentioned by the People's Bank of China relate to potential side effects that could occur if interest rates are lowered.

The People's Bank of China particularly emphasized inflation. It noted the possibility of rising inflation in the future and stated that it will pay close attention to changes on the demand side.

Last month, China's Consumer Price Index (CPI) rose by only 2.1% year-on-year. This is lower than the 2.8% increase recorded in September, which was the highest in 29 months. The Chinese authorities' inflation target is around 3%. Judging by the October CPI figure alone, the People's Bank of China's mention of potential inflation increases seems somewhat unexpected. It is interpreted as a preemptive concern with interest rate cuts in mind.

Previously, the People's Bank of China, together with six other departments including the China Banking and Insurance Regulatory Commission, the State Administration for Market Regulation, the National Development and Reform Commission, and the Ministry of Finance, issued a "Notice on Strengthening Support for the Extension of Principal and Interest Repayment for Small and Medium-sized Enterprise Loans" to banks and other financial institutions.

This can also be interpreted as a warning against easing regulations in the real estate market. Some in China expect that the People's Bank of China will cut the 5-year Loan Prime Rate (LPR), which affects the real estate market. This year, the People's Bank of China cut the 5-year LPR three times?in January, May, and August?to stimulate the real estate market. Despite these three rate cuts, the real estate market has not rebounded, leading to cautious speculation that the next rate cut might be larger.

On the 11th, the People's Bank of China extended the bank loan repayment period by one year for real estate project financing companies and also extended bond repayment periods. It also guided the extension of loan repayment periods for real estate borrowers.

In the monetary policy report, the People's Bank of China stated that, following decisions by the Party Central Committee and the State Council, it will focus on employment and price stability based on financial market "stability" and play a key role in effective investment.

It added that it will devise effective measures for economic stability and growth, promote reasonable increases in supply, and protect the interests of the people.

The People's Bank of China is scheduled to announce the 1-year and 5-year LPR rates, which serve as benchmark interest rates, on either the 20th or 21st.

This content was produced with the assistance of AI translation services.