China loan rate in spotlight as investors seek clues on health of world’s second-largest economy

China’s loan prime rate (LPR) could be lowered for the first time since early last year on Tuesday
The LPR, which currently stands at 3.85 per cent, is seen as China’s de facto benchmark funding cost since 2019 and is released on the 20th of each month

China economy

Bloomberg

Published: 1:30pm, 19 Jul, 2021

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China’s benchmark loan rate will be in the spotlight on Tuesday, with market participants divided over the need for more easing to support growth.

The loan prime rate (LPR) could be lowered for the first time since early last year as a sign of further support for China’s slowing economy, according to four analysts including Ming Ming at the country’s biggest brokerage. Four others see no change in the rate at a monthly announcement on Tuesday.

While data on Thursday allayed fears of a sharp slowdown in China’s growth, speculation persists that the central bank may unleash another round of easing after it reduced the amount of cash banks need to hold in reserve.

Any move by the authorities will be parsed by investors who are seeking clues on the health of the world’s second-largest economy and its implications on demand for commodities and trade in the region.

Banks will have more liquidity to make loans after the reserve-ratio cut, a move allowing them to ask for smaller premiums in lending and making room for a lower LPR

Ming Ming

“Banks will have more liquidity to make loans after the reserve-ratio cut, a move allowing them to ask for smaller premiums in lending and making room for a lower LPR,” said Ming, head of fixed-income research at Citic Securities.

However, the central bank is widely expected to refrain from flooding the market with cash after it injected just 100 billion yuan (US$15.2 billion) through medium-term loans on Thursday, compared with 400 billion yuan of maturities. It also kept the borrowing cost unchanged at 2.95 per cent.

The LPR, which currently stands at 3.85 per cent, is reported as a spread over this rate.

The LPR is seen as China’s de facto benchmark funding cost since a reform in 2019 and is released on the 20th of each month. While the rate is technically decided by a group of 18 banks, the cost is widely regarded to be an indicator for Beijing’s preference on loan rates.

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China’s economy rose 7.9 per cent year on year in the second quarter of 2021

Still, some analysts do not expect the LPR to be reduced as it would indicate a change in People’s Bank of China’s (PBOC) policy stance, which the central bank says remains unchanged despite its recent reserve requirement ratio cut.

Nathan Chow, a senior economist at DBS Bank, said the LPR will not be lowered this year unless the economy weakens more sharply.

That is because a cut sends a stronger signal on policy loosening, which Beijing would want to avoid as it seeks to contain financial leverage, he added.

“The PBOC will wait and see how effective previous stimulus are, before it moves to more aggressive easing,” Chow said.

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