Daily Management Review

As Anticipated, China Maintains Unchanged Lending Benchmark Rates


As Anticipated, China Maintains Unchanged Lending Benchmark Rates
Following the central bank's decision to maintain the stability of its medium-term policy rate earlier this week, China maintained benchmark lending rates at the monthly fixing on Wednesday, in line with market expectations.
But as deflationary pressure drives up real borrowing costs, market observers continued to expect Beijing to give further monetary easing into the new year to sustain a faltering economic recovery.
The five-year loan prime rate (LPR), which was left at 4.20%, was not altered, although the one-year LPR remained at 3.45%.
The second-largest economy in the world bases the majority of its new and existing loans on the one-year LPR, which is 3.45%. In 2023, it was reduced twice for a total of 20 basis points.
Mortgage rates are influenced by the five-year rate, which is now 4.20%. This year, it has decreased by 10 basis points thus far.
All 28 market observers surveyed by Reuters this week expected that neither the one-year nor the five-year LPR will move.
The one-year LPR is largely correlated with the medium-term lending facility (MLF) rate, and the stable fixes followed the central bank's decision to maintain its medium-term policy rate.
Market participants usually perceive shifts in the MLF to be ahead of shifts in the LPR.
Last week, the People's Bank of China (PBOC) increased the amount of liquidity it was injecting through medium-term policy loans while maintaining the same interest rate.
While maintaining the same interest rate, the central bank last week added a net 800 billion yuan ($112.22 billion) in new capital to the banking sector through medium-term lending facility (MLF) loans, marking the largest monthly increase on record.
"Although the PBOC avoided a reserve requirement ratio (RRR) cut in December and injected net liquidity at a record high ... we still look for 20 basis points of rate cuts and 50 basis points of RRR cuts next year," said Serena Zhou, senior China economist at Mizuho Securities.
"Furthermore, we expect the PBOC to prioritise guiding lower deposit rates rather than loan prime rates, considering the tight interest margins for most Chinese banks."
Analysts have stated separately that authorities might require a period of time to assess the results of recent budgetary support and redoubled efforts to stimulate the stagnant real estate market.
"The most recent push for lower spreads which allows commercial banks to charge less for new housing loans in tier-one Shanghai and Beijing has yet to be fully felt and warrants observation before more aggressive declines in the reference rate," said Bob Savage, head of markets strategy and insights at BNY Mellon Capital Markets.
The 18 designated commercial banks determine the LPR, which banks charge their best customers, and they submit recommended rates to the central bank each month.