China loan rate unchanged despite speculation of further policy easing to support economic growth
- The loan prime rate (LPR) has been 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
Banks in China kept the benchmark loan rate unchanged in July for the 15th straight month, indicating that the central bank is continuing to keep policy stable despite a recent surprise move to add liquidity to the financial system.
The one-year loan prime rate (LPR) was kept at 3.85 per cent, the same level it has been since April 2020, according to a release from the People’s Bank of China (PBOC) on Tuesday.
That followed statements from the central bank that the liquidity added last week did not represent a change of policy, disappointing some in the market who had hoped for more stimulus.
[In the second half of this year] we expect the PBOC to maintain a neutral monetary policy stance and keep benchmark interest rates unchanged as growth rates slow towards its long-term potential
The second-quarter data suggests Beijing can comfortably meet its growth target of more than 6 per cent for the year, even with high commodity prices making things more difficult for many firms.
“[In the second half of this year] we expect the PBOC to maintain a neutral monetary policy stance and keep benchmark interest rates unchanged as the growth rate slows towards its long-term potential.”
The five-year LPR, which is a reference for mortgages, was also unchanged at 4.65 per cent.
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China’s economy rose 7.9 per cent year on year in the second quarter of 2021
The LPR has been considered China’s de facto benchmark funding cost since 2019. The rate is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank’s medium-term lending facility (MLF).
The central bank announced a cut to the required reserve ratio (RRR) earlier this month, prompting speculation that it had reversed course and started adding stimulus to support economic growth. The change went into effect last week and meant that there is around 1 trillion yuan (US$154 billion) in additional liquidity available for banks to lend.
The steady fixings for China’s loan prime rates reinforce a view that the PBOC is not keen to add aggressive easing. An earlier reduction in banks’ RRR triggered speculation that the LPRs might also be lowered, but the PBOC is seen unlikely to guide them lower, considering the solid state of the recovery.
“Today’s LPR is a bit disappointing to the market,” said Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group in Shanghai. “The authorities will focus on aggregate funding cost reduction in the second half of the year. We believe more easing measures will be seen later, including green MLF and green relending.”
The central bank may have room to cut the RRR further this year, according to analysts cited in a front-page article in the China Securities Journal. Such a move would be mainly aimed at offsetting liquidity demand rather than easing policies, they said.
China’s short-term interbank funding costs climbed for a second day Tuesday after the interest-rate decision. If interbank liquidity spikes as it did in January, the PBOC could step in to push it back down through one of its policy tools such as open market operations, another RRR cut or medium-term loans.
There are trillions of yuan in such loans expiring between now and the end of the year, as the one-year loans the PBOC made last year to support the economy through the pandemic mature.
Depending on the market liquidity conditions, the PBOC can roll over some or all of these loans, or let them expire, which could reduce the amount of money in the interbank market.
China’s monetary policy remains stable, and the possibility of large scale easing in the second half of the year is still very low
Banks may need extra funds in the second half of this year if they are to purchase the government bonds expected to hit the market during that period. The sale of government debt in the first half of 2021 was slower than last year, and that pace will need to pick up if the government is to sell all the 4.5 trillion yuan in government debt in the annual plan.
China’s top leadership should give some indication of their economic plans sometime this month. The Politburo usually meets in July to assess the economy in the first half of the year and plan for the second half.
“The steady LPR can contain market expectations on further easing for now,” according to Zhou Hao, senior emerging markets Economist at Commerzbank AG.
“China’s monetary policy remains stable, and the possibility of large scale easing in the second half of the year is still very low.”
