China keeps loan rate steady for third straight month with ‘inaction not surprising’ as economy improves

The one-year loan prime rate (LPR) was kept unchanged at 3.85 per cent, while the five-year LPR remained at 4.65 per cent
Official data showed China’s economy grew 3.2 per cent in the second quarter from a year earlier, faster than the 2.5 per cent expected by analysts

China economy

Reuters

Published: 10:25am, 20 Jul 2020

Why you can trust SCMP

China kept its benchmark lending rate steady for the third straight month on Monday, matching market expectations, amid signs that the world’s second-largest economy is recovering from the shock coronavirus pandemic.

The one-year loan prime rate (LPR) was kept unchanged at 3.85 per cent, while the five-year LPR remained at 4.65 per cent.

Most new and outstanding loans are based on the LPR, while the five-year rate influences the pricing of mortgages.

Thirty-four out of 36 participants in a Reuters survey had expected no adjustment to LPR in July after the People’s Bank of China (PBOC) kept borrowing cost on medium-term lending facility (MLF) unchanged last week.

Latest data about world’s second largest economy

“The inaction is not surprising: the PBOC did not lower the rate on its medium-term lending facility (MLF) this month as it did ahead of the past three LPR cuts,” said Martin Rasmussen, China economist and Capital Economics.

“This would have been the most straightforward way for the PBOC to push down the LPR, which is set as a spread above the MLF rate. The PBOC has also allowed market interbank rates to rise in the past two months, which will have made banks more reluctant to lower their lending rates.”

MLF, one of the PBOC’s main tools in managing longer-term liquidity in the banking system, serves as a guide for the LPR.

The interest rate on one-year MLF loans to financial institutions also stayed unchanged at 2.95 per cent for three straight months.

Policy discussions now centre on how to maintain restrictions on lending to shadow banks and property developers, and how to best manage the increase in non-performing loans that the Covid-19 outbreak has led to

Martin Rasmussen

Against the backdrop of improving economic data, analysts and economists said policymakers have started to shift away from powerful, emergency monetary easing to more targeted schemes to help areas of the economy that are still struggling. Policymakers are also concerned that too much stimulus could stoke more debt and financial risks.

Official data showed China’s economy grew 3.2 per cent in the second quarter from a year earlier, faster than the 2.5 per cent expected by analysts, as lockdown measures ended and policymakers ramped up stimulus after a record, virus-induced contraction early in the year.

The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August 2019, loosely pegging it to the MLF rate.

“Economic activity continued to strengthen going into quarter three, and fiscal policy is set to boost activity for the remainder of the year,” added Rasmussen.

“That should allow the PBOC to step back from easing and instead focus on the financial risks that have accumulated this year. Policy discussions now centre on how to maintain restrictions on lending to shadow banks and property developers, and how to best manage the increase in non-performing loans that the Covid-19 outbreak has led to. Further policy rate cuts seem increasingly unlikely.”

Post