© Reuters. FILE PHOTO: Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang
SHANGHAI/SINGAPORE (Reuters) -China kept its benchmark lending rates unchanged for the ninth month in May on Monday, matching market expectations, as a weakening yuan and widening yield differentials with the United States limited the scope for any substantial monetary easing.
A raft of data over the past month or so, including April indicators last week, pointed to an economy losing momentum after the initial post-COVID bounce and lifted hopes of more easing measures.
But given capital outflow risks that could further hurt a sliding yuan, some analysts now expect the People’s Bank of China (PBOC) could lower the amount of cash banks must set aside as its next policy move.
Earlier in the day, China’s one-year loan prime rate (LPR) was kept at 3.65% and its five-year LPR was unchanged at 4.30%.
In a Reuters poll of 26 market watchers conducted last week, 23 predicted no change to the rates for this month.
“Despite the April weakness, we do not expect policymakers to unleash major stimulus as the 5% GDP growth target is still well within reach and issues such as property risks and youth unemployment require a more targeted approach,” economists at Goldman Sachs (NYSE:) said in a note.
“Within monetary policy, symbolic measures such as a reserve requirement ratio (RRR) cut are more likely than policy rate cuts this year given the already wide U.S.-China interest rate differential and depreciation pressure.”
weakened past the psychologically important 7 per dollar last week to hit five-month lows. It has fallen nearly 5% from highs hit in late January. [CNY/]
At the same time, the yield gap between China’s benchmark 10-year government bonds and their U.S. counterparts is hovering at the widest level in two months.
The steady LPR fixings also came after the PBOC rolled over maturing medium-term lending facility (MLF) loans while keeping the interest rate unchanged last week.
The MLF rate serves as a guide to the LPR and markets mostly use the medium-term rate as a precursor to any changes to the lending benchmarks.
Economists at Capital Economics said last week the central bank’s goal was to ensure that credit growth, which slumped in April, would not slow too much as “the reopening boost to credit demand fades.”
“This can probably be achieved without policy rate cuts, which we think the PBOC will try to avoid,” they said.
“The downside to lowering the LPR is that it reduces banks’ return on their existing loan book, adding pressure to their net interest margins, which are at a record low.”
They said the PBOC may use other tools such as RRR cuts, deposit rate window guidance and liquidity injections to guide funding costs lower.
The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks who submit proposed rates to the central bank every month.
Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China last cut both LPRs in August 2022 to boost the economy.
The People’s Bank of China (PBoC) announced on Tuesday that the benchmark lending rate for one-year loans would remain unchanged, while market observers predict the central bank will reduce the reserve requirement ratio (RRR) as the nation’s next move to bolster the slowing economy.
The Chinese economy is experiencing the slowest growth rate in nearly three decades of 6.5 percent in the third quarter, which has led to speculation that the PBoC will either cut the lending rate or reduce the reserve ratio to help drive growth. The PBoC’s decision to maintain the lending rate was expected by analysts and suggests the focus is shifting to stimulating growth by relaying on the RRR.
The RRR is the amount of deposits commercial banks must keep in reserve with the PBoC. A lower reserve ratio means that banks have more funds available to lend to customers, which can help boost economic activity.
An influential state think-tank has already indicated that the government is planning to reduce the reserve ratio, potentially by as much as two percent. The PBoC has not yet made a formal announcement of its intentions regarding the reserve ratio but is expected to make a decision in the near future.
The Chinese government has been taking measures to stimulate the economy for the last year, and the decision to leave the lending rate unchanged shows that the authorities are no longer relying on conventional tools to jumpstart growth.
The decision to hold rates steady and rumors of a reserve ratio cut come shortly after the United States imposed tariffs on $200 billion worth of Chinese goods. The trade war between the U.S. and China has been an economic headwind for Chinese growth and the central government is determined to counteract its effects.
Further signs of economic stimulus measures by the PBoC would indicate the authorities’ efforts to navigate the risks posed by external factors to the Chinese economy.