In an anticipated move, China is expected to keep its lending benchmark rates steady during the monthly fixing this Wednesday, according to a recent Reuters survey. This decision comes as the Chinese economy shows signs of stabilization, and concerns over a weakening yuan limit further monetary easing measures.
The loan prime rate (LPR), typically applied to banks’ top-tier clients, is recalculated each month following submissions of proposed rates from 18 designated commercial banks to the central bank, the People’s Bank of China (PBOC).
Among 29 market analysts and traders polled, unanimous consensus predicts that the one-year LPR will remain at 3.45%, consistent with the central bank’s maintenance of the medium-term policy rate in the previous week.
Regarding the five-year tenor, a majority of 90% of respondents (26 out of 29) expect it to remain unchanged at 4.20%, while three participants forecast a slight reduction of 5 to 10 basis points.
Notably, the majority of new and existing loans in China, the world’s second-largest economy, are tethered to the one-year LPR, with the five-year rate influencing mortgage pricing.
The medium-term lending facility (MLF) rate serves as a guiding factor for the LPR, and market participants primarily rely on the MLF rate as an indicator of potential changes to lending benchmarks.
China did reduce the one-year benchmark lending rate in August but surprised observers by maintaining the five-year rate amidst broader concerns about the rapid depreciation of its currency.
Lin Li, Head of Global Markets Research for Asia at MUFG Bank, commented on the situation, stating that both the one-year and five-year LPRs are expected to remain steady. Li attributed this to the weakening yuan, which, due to widening yield differentials with other major economies, may restrict the scope for monetary policy adjustments.
Li stated, “The already large negative yield spreads over the U.S. limit the room for rate cuts this month. While the August data helped to boost yuan sentiment, we think a turnaround will still depend on more data supporting a stronger economic recovery and improving yield differentials.”
As of Tuesday, the yield gap between China’s 10-year government bonds and their U.S. counterparts stood at 163 basis points, close to the widest level seen in 16 years, recorded in late August, at 171 basis points.
These growing yield differentials have led to a decline of more than 5% in the Chinese yuan this year, positioning it as one of Asia’s weakest-performing currencies.
Despite these concerns, a series of economic indicators, including August’s credit lending growth, factory output, and retail sales, signal that the world’s second-largest economy is gaining momentum.
In support of the economic recovery, China’s central bank recently reduced the reserve requirements for banks for the second time this year, aiming to enhance liquidity within the financial system.
