Banks' net interest margins at lowest since data first tabulated in 2010
China is expected to keep its benchmark lending rates unchanged on Wednesday, experts said, adding that there is still ample space for policymakers to further step up monetary policy easing in the following months.
Experts predicted the one-year loan prime rate will remain unchanged at 3.45 percent, while the over-five-year LPR should also stay at 4.2 percent, considering the latest round of policy rate cuts in August as well as intensified pressure on commercial banks' profit margins.
Their comments came after the central bank stood pat on a key policy rate last week. The People's Bank of China kept the rate on a 591 billion yuan ($81 billion) one-year medium-term lending facility at 2.5 percent, which is usually seen as a precursor to future changes to the lending benchmarks.
Lou Feipeng, a researcher at Postal Savings Bank of China, said China is less likely to cut its benchmark lending rates on Wednesday, as the lending rates to firms and mortgage rates are at a low level after multiple LPR cuts.
Lou said banks' net interest margins are also at the lowest point since statistical data were first announced in 2010.
"Banks need to stabilize net interest margins to enhance their sustainable support for the real economy," he said. "And the reduction in rates on existing first-home mortgages also has a significant impact on the net interest margins of banks."
Looking ahead, Lou said there is still sufficient room for further LPR cuts, and whether there will be cuts within the year depends on the subsequent economic recovery.
"On the monetary policy front, our baseline assumption expects the PBOC to keep policy rates and the reserve requirement ratio unchanged for the rest of the year, but the decision could be data dependent," said Zhu Haibin, JPMorgan's chief China economist.
"If economic activity cools off again in the coming months, a further small-step rate cut could be an option in late 2023 or early 2024," Zhu said.
The National Bureau of Statistics said the official snapshot of fresh signs points to a steady economic recovery, as China's industrial output and retail sales jumped 4.5 percent and 4.6 percent year-on-year in August, respectively, up from 3.7 percent and 2.5 percent increases in July.
Citing the better-than-expected data in August, Zhou Maohua, an analyst at China Everbright Bank, said the country's economy is on track for a steady recovery this year, and the recovery may gather pace in the following months.
However, Zhou warned that the broader economy is still facing pressure from still-sluggish domestic demand and mounting uncertainties from the external environment.
He called for strengthening coordination among fiscal, monetary and industrial policies, saying more efforts should be made to support weak links like small and micro businesses as well as increase support for key fields including manufacturing and green development.
Zhou's views were echoed by Yang Haiping, a researcher at Central University of Finance and Economics' Institute of Securities and Futures, who said the foundation for economic recovery is not yet solid, and highlighted the importance of further policy steps to shore up growth.
In the short term, he said it is advisable to rely more on a combination of fiscal, industrial, consumption and social policies to solidify the positive development trend of economic recovery.