At a monthly fixing on Wednesday, China kept benchmark Lending Rates unchanged. The unchanged China’s lending rates was in line with expectations as fresh signs of economic stabilization and a weakening yuan has reduced the need for immediate monetary easing.

China kept its benchmark lending rates unchanged at the monthly fixing on Friday, matching market expectations. This was also after the central bank kept its policy rates unchanged earlier this month. China cut the one-year benchmark lending rate in August but surprised the markets by keeping the five-year lending rate unchanged.

Is China’s economy stable?

Recent economic data showed the world’s second-largest economy, China was finding its footing after a sharp slowdown. The yuan declines have reduced the urgency for China’s authorities to aggressively cut lending rates to prop up growth.

The one year Loan prime rate (LPR) was kept at 3.45%, while the five-year loan prime rate was unchanged at 4.20%.

Most new and outstanding loans in China are based on the one year loan prime rate, while the five-year rate influences the pricing of mortgages.

Unchanged one year loan prime rate

As per a survey, expect no change to the one year loan prime rate, while a vast majority also expected the five-year rate to remain steady.

The steady loan prime rate fixings follow the central bank’s decision last week to roll over maturing medium term policy loans and keep interest rate on those loans unchanged.

The medium term lending facility rate serves as a guide to the loan prime rate and markets see it as a precursor to any changes to the lending benchmarks.

Efforts to bring yuan up

Widening yield differentials with other major economies, particularly the U.S., and faltering domestic growth have pressured the Chinese yuan down more than 5% against the dollar this year, prompting authorities to ramp up efforts to rein in the weakness.

“Monetary policy rollout maintains its steady pace, and there are still chances for reductions to LPRs next month,” said Xing Zhaopeng, senior China strategist at the Australia and New Zealand Banking Group.

“Net interest margin is not an obstacle for rate cuts as banks have lowered deposit rates.”

Xing added that economic data will continue to improve in the fourth quarter and that the low base effect will ensure growth exceeds 5%.

“The policy impact will extend to the next few quarters. We have revised our 2023 and 2024 GDP forecast up to 5.1% and 4.2%,” he said.

Economic recovery

China’s central bank last week lowered the amount of cash banks must hold as reserves for a second time this year to boost liquidity and support the economic recovery.

Despite the steady LPR, some market watchers said recent property easing measures suggest cuts to the five-year LPR and more policy stimulus are likely in coming months.

“Looking forward, we expect property sales volume to stabilize gradually at low levels in the coming months, infrastructure investment to grow at a robust but slower pace on a high base,” said Wang Tao, chief China economist at UBS.

“We maintain our real GDP growth forecast of 4.8% for full-year 2023. The development of property downturn, the magnitude and pace of policy easing still remain the biggest uncertainty for future growth trajectory.”

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