China’s banks kept their benchmark lending rates unchanged for the 11th consecutive month on Monday, following the central bank’s decision to hold its policy rate steady last week. The move reflects the cautious stance of the People’s Bank of China (PBOC) amid rising inflation, a weakening yuan and a slowing economy.
The PBOC announced last Wednesday that it would keep its one-year medium-term lending facility (MLF) rate at 2.95%, the same level since April 2022. The MLF rate is the basis for the loan prime rate (LPR), which is the reference for most corporate and household loans in China.
The PBOC said that the decision was made to “maintain reasonable and sufficient liquidity in the banking system and support the steady recovery of the real economy”. The central bank also injected 600 billion yuan ($93.6 billion) into the financial system through the MLF operation, the largest amount since January.
The PBOC has refrained from cutting its policy rate or the reserve requirement ratio (RRR) for banks this year, opting instead for more targeted measures such as lowering the interest rate on its relending and rediscount facilities, which are aimed at supporting small businesses and rural sectors.
LPRs Unchanged at 3.65% and 4.3%
Following the PBOC’s lead, Chinese banks kept their one-year and five-year LPRs unchanged at 3.65% and 4.3% respectively on Monday, according to a statement by the National Interbank Funding Center. The LPRs are based on the interest rates that 18 banks offer to their best customers and are published by the PBOC on the 20th of each month.
The LPRs have been unchanged since December 2022, when the PBOC cut them by 5 basis points each. The LPRs are lower than the benchmark lending rates, which have been kept at 4.35% and 4.75% since October 2015.
The LPRs are expected to remain stable in the near term, as the PBOC balances the need to support the economy with the need to contain inflation and financial risks.
Economic Growth Slows to 4.9% in Q3
The decision to keep the LPRs unchanged comes amid signs of a slowdown in China’s economic recovery from the Covid-19 pandemic. China’s gross domestic product (GDP) grew by 4.9% year-on-year in the third quarter of 2023, down from 7.9% in the second quarter and below the market consensus of 5.2%.
The slowdown was mainly due to the impact of the Delta variant outbreak in July and August, which led to strict lockdowns and travel restrictions in some regions. The outbreak also disrupted the global supply chain and trade, affecting China’s exports and imports.
The economic data for October showed some improvement, as the Covid-19 situation eased and the government ramped up fiscal and monetary support. Industrial production rose by 3.5% year-on-year, up from 3.1% in September, while retail sales increased by 4.9%, up from 2.5%. Fixed asset investment grew by 8.9% in the first 10 months of the year, slightly higher than the 8.8% in the first nine months.
However, the outlook for the fourth quarter remains uncertain, as China faces multiple challenges such as rising inflation, a weakening yuan, a cooling property market and geopolitical tensions.
Inflation Hits 13-Year High of 4.9% in October
One of the main challenges for the PBOC is to rein in inflation, which has surged to a 13-year high of 4.9% in October, well above the government’s target of around 3%. The inflation spike was driven by soaring food and energy prices, as well as the base effects from last year’s low levels.
Food prices jumped by 11.9% year-on-year in October, the highest since February 2020, mainly due to the supply shortage of pork, vegetables and eggs. Energy prices soared by 28.5%, the highest since December 2008, as coal and natural gas prices surged amid tight supply and strong demand.
The PBOC has taken some steps to ease the inflation pressure, such as releasing some of its state reserves of pork, corn and oil, and increasing the supply of coal and natural gas. The central bank has also tightened its control over the money supply and credit growth, and warned banks to curb excessive lending to sectors with high energy consumption and emissions.
Yuan Weakens to Three-Year Low Against the Dollar
Another challenge for the PBOC is to stabilize the exchange rate of the yuan, which has weakened to a three-year low against the US dollar in recent weeks. The yuan has depreciated by more than 6% since June, when it reached its strongest level since 2018.
The yuan’s weakness is partly due to the divergence in monetary policy between China and the US, as the Federal Reserve prepares to taper its bond-buying program and raise interest rates next year, while the PBOC maintains its accommodative stance. The yuan is also under pressure from the capital outflows, as some investors seek higher returns and lower risks in other markets.
The PBOC has intervened in the foreign exchange market to prevent the yuan from falling too fast and triggering a vicious cycle of depreciation and capital flight. The central bank has also tightened the regulations on cross-border capital flows and cracked down on illegal foreign exchange activities.
Property Market Cools Amid Tighter Regulations
A third challenge for the PBOC is to manage the risks in the property market, which accounts for about a quarter of China’s GDP and a large share of its debt. The property market has cooled significantly in recent months, as the government tightened the regulations on financing, land sales and home purchases, and cracked down on speculation and fraud.
The property sales volume fell by 19.7% year-on-year in October, the biggest drop since February 2020, while the property investment growth slowed to 7.4% in the first 10 months of the year, the lowest since April 2020. The property prices also moderated, with the average new home price rising by 3.8% year-on-year in October, down from 4.2% in September.
The slowdown in the property market has weighed on the economic growth, consumer confidence and local government revenues. It has also increased the financial stress for some property developers, especially the highly indebted Evergrande Group, which has been struggling to repay its creditors and avoid default.
The PBOC has adopted a differentiated approach to support the property market, by providing liquidity to the banks that lend to the developers and homebuyers, while maintaining the prudential rules and supervision. The central bank has also urged the local governments to ensure the stability and order of the market, and protect the legitimate rights and interests of the stakeholders.
Geopolitical Tensions Escalate Over Taiwan and Trade
A fourth challenge for the PBOC is to cope with the geopolitical tensions between China and the US, which have escalated over the issues of Taiwan and trade. The US has increased its military presence and diplomatic support for Taiwan, which China considers as a renegade province that must be reunited with the mainland. China has responded by conducting frequent air and naval exercises near the island, and warning the US not to interfere in its internal affairs.
The trade relations between China and the US have also deteriorated, as the US imposed new sanctions and tariffs on some Chinese goods and entities, and accused China of unfair trade practices and human rights violations. China has retaliated by imposing its own sanctions and tariffs on some US goods and entities, and rejecting the US demands for structural reforms.
The PBOC has tried to mitigate the impact of the geopolitical tensions on the economy, by diversifying its trade and investment partners, promoting the internationalization of the yuan, and enhancing its financial resilience and innovation.
Conclusion
China’s banks have kept their lending rates unchanged for the 11th consecutive month on Monday, following the PBOC’s decision to hold its policy rate steady last week. The move reflects the cautious stance of the PBOC amid rising inflation, a weakening yuan and a slowing economy. The PBOC faces multiple challenges such as managing the risks in the property market, stabilizing the exchange rate of the yuan, reining in inflation and coping with the geopolitical tensions. The PBOC is expected to maintain its accommodative stance in the near term, but may cut its policy rate or the RRR in the coming months if the economic situation worsens.