China set to hold key rate as margin pressure, weaker yuan hamper policy easing

SHANGHAI/SINGAPORE (Reuters) - China's central bank is widely expected to leave a key policy rate unchanged when rolling over maturing medium-term loans next Monday, a Reuters survey showed.

Worsening interest margins and a weakening Chinese yuan continued to hobble authorities' monetary easing efforts to support the world's second-largest economy.

In a Reuters poll of 31 market watchers conducted this week, 30, or 97%, of all respondents expected the People's Bank of China (PBOC) to keep the interest rate on the one-year medium-term lending facility (MLF) loan unchanged at 2.50% from the previous operation.

The lone outlier in the poll projected a marginal interest rate reduction of 5 basis points.

Among all respondents, a vast majority of 20, or 65%, predicted that the central bank would fully roll over the maturing loan of 237 billion yuan ($32.67 billion) due this month.

"In terms of policy support, we see an ongoing shift in government policy from monetary easing towards fiscal stimulus to bolster domestic demand," said Serena Zhou, senior China economist at Mizuho Securities.

"Consequently, we do not anticipate the PBOC to cut its MLF rate or for banks to lower their loan prime rates (LPRs) in the coming weeks, despite ongoing weakness in the property market."

China's finance ministry has started selling 1 trillion yuan in long-awaited, long-term special treasury bonds since May to raise funds it will use to stimulate key sectors of the flagging economy.

The MLF rate serves as a guide to the LPRs and markets mostly use it as a precursor to any changes to the lending benchmarks.

For the PBOC, another issue with implications for policy is the commercial banks' continued fall in profits and the narrowing in net interest margin, a key gauge that measures the health of lenders, to 1.54% in the first quarter of this year.

"It could be now very close to an unsustainable territory at an all-time low of 1.54% in the first quarter of 2024," Yu Xiangrong, chief China economist at Citi, said in a note.

"Such a domestic constraint could be increasingly binding for financial stability concerns, not prompting an imminent rate cut."

Separately, the persistent weakness in the Chinese yuan against the backdrop of widening yield differentials between China and other major economies continued to limit Beijing's monetary easing efforts.

China's central bank is "walking this fine line, given some of the external situations, especially a strong dollar and depreciation pressure" on the broader Asian currencies, said David Chao, global market strategist for Asia Pacific at Invesco.

($1 = 7.2549 Chinese yuan)

(Reporting by Wu Fang and Winni Zhou in Shanghai, Tom Westbrook in Singapore; Editing by Shri Navaratnam)