China’s central bank, the People’s Bank of China (PBOC), announced on Friday that it would maintain its benchmark lending rates, keeping the one-year loan prime rate (LPR) steady at 3.1% and the five-year LPR at 3.6%. This decision comes as Beijing grapples with the dual challenge of stimulating economic growth and managing the weakening yuan. The one-year LPR is crucial for corporate and most household loans, while the five-year LPR serves as a reference for mortgage rates.
The move aligns with market expectations, as indicated by a Reuters poll of 27 economists. The rate decision follows the U.S. Federal Reserve’s widely anticipated 25-basis-point rate cut earlier this week, coupled with signals that the Fed would implement fewer rate reductions in 2025 than previously projected. The Fed’s revised plan includes only two cuts in 2025, down from four cuts forecasted in September.
Analysts believe the Fed’s outlook on rate adjustments will have a limited impact on the PBOC’s monetary easing trajectory. However, it could intensify pressure on the Chinese yuan, which is already under strain. “The PBOC is not stepping in to defend the yuan,” Farzin Azarm, managing director of equities trading at Mizuho Americas, told CNBC. Azarm noted that the central bank appears to be allowing market dynamics to play out amid the ongoing economic pressures.
In recent months, Chinese officials have pledged to increase monetary easing measures to address sluggish economic growth. Earlier this year, the PBOC surprised markets with cuts to major short-term and long-term lending rates in July, followed by a 25-basis-point reduction in October. However, the central bank held rates steady in November and has now opted to maintain the status quo for December.
Despite these efforts, China continues to face entrenched economic challenges, including deflationary pressures, weak consumer demand, and a prolonged property market slump. Analysts from major investment banks predict that the yuan will weaken further in 2024, particularly if U.S. policies under President-elect Donald Trump include the implementation of tariffs on Chinese goods.
Yan Wang, chief emerging markets and China strategist at Alpine Macro, stated that the Fed’s easing cycle could provide room for the PBOC to implement further rate cuts. However, Wang emphasized that fiscal measures would play a more significant role in stimulating China’s economy next year. “The Chinese government has greater fiscal flexibility and is likely to rely on fiscal initiatives to drive growth,” Wang said in a note to CNBC.
