China's Central Bank, the People's Bank of China, left the loan prime rate (LPR), which effectively serves as the benchmark rate, unchanged for a fourth straight month. Even as signals of an economic slowdown are clear, authorities appear to be holding off on additional stimulus and watching for policy effects as the stock market has rebounded recently and exports have shown signs of recovery.
The People's Bank of China said on the 22nd (local time) it kept the one-year LPR, the benchmark for general loans, at an annual 3.0%, and the five-year LPR, the benchmark for dwellings mortgage loans, at an annual 3.5%. The decision matched the forecast from a Reuters survey of 20 market experts.
The LPR is a rate calculated by averaging the prime lending rates reported by 20 Chinese commercial banks. It effectively serves as the benchmark for all lending rates across financial institutions in China. Because the People's Bank of China has not adjusted its policy rate for a long time, the current LPR functions as the de facto benchmark rate. The one-year LPR affects most new and existing loans, while the five-year LPR influences dwellings mortgage rates.
The People's Bank of China's decision to hold rates this time was largely expected. As downside pressure on the economy grew, China cut the LPR by 0.1 percentage point (p) in May, adjusting rates for the first time in seven months. Since June through this month, it has kept rates on hold for four consecutive months, signaling caution. This contrasts with the U.S. Federal Reserve, which lowered its benchmark rate on the 18th.
Positive economic signals that have emerged recently are cited as the backdrop for why Chinese financial authorities are not rushing additional stimulus. Reuters, citing market experts, said, "China's stock market has recently been on the rise, and export performance is also relatively solid." Although economic indicators in Jul. and Aug. were weak in succession, the view is that authorities chose to watch the effects of existing policies for now.
However, if signs of an economic slowdown become clear again, the People's Bank of China still has room to pull out an additional rate cut. Larry Hu, chief China economist at Macquarie, said, "The persistently weak data throughout Jul. and Aug. likely gave policymakers justification to take more steps to stabilize the economy," forecasting a 0.1 percentage point (10bp) cut by year-end. He said, "(Chinese authorities) do not want to miss the 5% growth target, but they also do not want to overshoot it," projecting gradual fine-tuning rather than a large-scale stimulus package.