Shanghai/Singapore – The benchmark lending rates in China were kept unchanged at the monthly fixing on Monday, in line with expectations. This decision was influenced by a weaker yuan and the authorities’ desire to assess the impact of previous stimulus measures on credit demand.
Although there have been positive surprises in industrial output and retail sales, the Chinese economy still faces challenges such as deflation and a struggling property market. While it requires further policy stimulus, excessive monetary easing could put downward pressure on the Chinese currency.
The one-year loan prime rate (LPR) remains at 3.45%, while the five-year LPR stands at 4.20%. The majority of new and outstanding loans in China are based on the one-year LPR, while the pricing of mortgages is influenced by the five-year LPR.
In a recent poll conducted among 26 market analysts, all participants predicted that there would be no changes to either the one-year or five-year LPR.
This decision comes after the central bank had maintained its medium-term interbank liquidity rate last week. The one-year LPR is indirectly linked to the medium-term lending facility (MLF), and market participants typically consider changes in the MLF rate as an indicator for adjustments in the LPR.
Although the People’s Bank of China injected 1.45 trillion yuan of one-year MLF loans into the banking system last week, the rates on those loans remained unchanged. This move resulted in a net cash injection of 600 billion yuan into the banking system, which is the largest monthly increase since December 2016.
Julian Evans-Pritchard, head of China economics at Capital Economics, suggests that policymakers might want more time to assess the impact of recent changes to existing mortgage contracts before making further adjustments to the benchmark rate. However, given the weak economic momentum and a reversal in downward pressure on the renminbi, it is anticipated that rate cuts will be implemented in the near future. Evans-Pritchard expects China to lower the lending benchmark by 20 basis points by the end of the first quarter next year.
After experiencing a decline of more than 6% against the dollar in September, the yuan has managed to recover some of its losses year-to-date. China’s approach of loosening monetary policy to support its economic recovery differentiates it from other global central banks. However, further rate cuts would widen the yield gap with the United States, potentially leading to yuan depreciation and capital outflows.
The LPR, which is usually charged by banks to their top clients, is determined by 18 designated commercial banks that submit proposed rates to the central bank every month.
