The People's Bank of China, the central bank, has maintained its benchmark interest rate for five months. With the net interest margin of commercial banks at a historic low, it has become difficult to lower lending rates further, but some economic indicators have shown favorable levels, buying time for the central bank. However, concerns about the real estate slump and deflation (price decline amid economic recession) persist, and as trade tensions with the United States escalate, there are calls for a reduction in the benchmark interest rate.
On the 20th, the People's Bank of China announced that it would freeze the one-year and five-year loan prime rates (LPR) at 3.1% and 3.6%, respectively. This aligns with market expectations. The one-year and five-year LPR have maintained the same levels for five months since being lowered by 0.25 percentage points each in October of last year.
The LPR is the average interest rate for loans given to prime customers by 20 commercial banks. When the People's Bank of China announces the LPR, all financial companies reference it for loans, effectively making it a benchmark interest rate. The one-year LPR affects the interest rates of general short-term loan products such as credit and corporate loans. The five-year LPR serves as the standard for housing loan interest rates.
The deterioration in the profitability of commercial banks is cited as a factor for the People's Bank of China freezing the LPR. Bloomberg noted, "The net interest margin of banks is at a record low." According to the state-run Yangguang Network, various lending rates have declined, causing the net interest margin of Chinese commercial banks to drop to 1.52% in the fourth quarter of last year. This not only falls below the warning level of 1.8% but also marks a historic low.
The recent favorable performance of some economic indicators also underlies the central bank's reluctance to hasten a decrease in the LPR. Recently, China's National Bureau of Statistics reported that retail sales from January to February increased by 4.0% compared to the same period last year, aligning with market expectations. Monthly industrial production and fixed asset investment, often considered as China's gross domestic product (GDP) indicators, also exceeded forecasts, rising by 5.9% and 4.1%, respectively, compared to projections of 5.3% and 3.6%. Wang Qing, the chief macroeconomic analyst at Dongfang Jincheng International Credit Rating Co., noted, "The continued effects of last year's policy package are maintaining a strong growth momentum at the start of the year," and added, "With the growth rates of consumption and investment accelerating, the necessity and urgency for reducing interest rates are not high."
However, the possibility that the People's Bank of China might soon initiate a rate cut remains alive. The continuous real estate slump, combined with falling prices leading to persistent deflation concerns, contributes to this situation. In fact, from January to February, the amount of investment in real estate development decreased by 9.8% compared to the same period last year, and the consumer price index (CPI) inflation rate also dropped by 0.7%, turning negative for the first time in 13 months. Additionally, the trade conflict with the United States is just beginning, which poses a challenge. Lowering the benchmark interest rate would be necessary to stimulate the economy and fill the gap left by exports, which were the biggest growth driver last year.
This year, the Chinese leadership has stated its intention to lower rates at the appropriate time and supply long-term liquidity. Bloomberg reported, "It is expected that in the coming months, monetary and fiscal stimulus measures will offset the impact of the increase in U.S. tariffs." Analyst Wang remarked, "There is a possibility that the five-year LPR will be lowered 'considerably' this year."