China’s Easing Improves Credit Demand and Stabilizes Credit Quality Outlooks; NIM Impact Manageable

Following The People's Bank of China's 10-basis-point cut to the borrowing rates of one-year medium-term lending facility, or MLF, and the seven-day reverse repurchase agreements on Jan. 17, we revisited potential impacts on Chinese banks. We previously expected two to three rounds of 5-basis-point cuts to the Loan Prime Rate, or LPR, in the first half--the 10-basis-point MLF rate cut is expected to translate to a 10-basis point cut to one-year LPR and a 5-basis-point cut to five-year LPR on Jan. 20. This indicated downward pressures on NIM are more front-loaded than we previously expected. In reference to the previous rate cut cycle, our models now factor in a total of 25- and 10-basis-point cuts to one-year and five-year LPRs, respectively, in 2022. We also see policy tools to ease the pressure, including a reserve requirement rate cut, RRR, a change in the deposit rate-setting method, and lower interbank rates as results of the key policy rate cut.