China kept its loan prime rate (LPR), a de facto benchmark rate, unchanged for the eighth straight month on the 20th. However, it lowered the relending rate for rural areas, small businesses, and the science and technology sector and raised the loan limit ahead of that. Experts said an LPR cut is likely within the first quarter to revive a deteriorating domestic economy marked by a real estate crisis, plunging investment, and weak consumption.
The People's Bank of China said it would keep the 1-year LPR for January at 3% and the 5-year LPR at 3.5%. The LPR is the rate banks apply to high-credit customers and is calculated based on proposed rates submitted by commercial banks to the central bank. The 1-year LPR affects household loans, and the 5-year LPR affects mortgage loan lending rates. The central bank cut the LPR in May last year for the first time in seven months and has held rates steady since.
Even so, market experts viewed a rate cut as likely in the first quarter. According to Reuters, local bank officials in China said, "We should watch for potential changes to policy rates in February," and, "After a policy rate cut in the first quarter, lending rates will be lowered." U.S. business outlet CNBC, citing Nomura Securities, said, "China is stoking concerns about the worst domestic slowdown of the 21st century," and forecast the central bank would cut the reserve requirement ratio (RRR) by 0.5% and the policy rate by 0.1% in the first quarter.
Separately, the central bank will expand relending rates and limits to support rural areas, small and midsize businesses, and the science and technology sector. On the previous day, it said it would cut relending rates supporting agriculture and small businesses by 0.25 percentage point to 0.95% for three months, 1.15% for six months, and 1.25% for one year. The rediscount rate was lowered to 1.5%, the pledged supplementary lending (PSL) rate was set at 1.75%, and the rate for certain structural currency policy tools was adjusted to 1.25%.
In addition, the central bank will raise the relending and rediscount limits for rural and small-business support by 500 billion yuan (about 106 trillion won) and will set aside a separate 1 trillion yuan (about 212 trillion won) relending quota for small private companies within the overall limit to prioritize support for them. The loan limit for science and technology innovation and technological transformation will rise from 800 billion yuan (about 170 trillion won) to 1.2 trillion yuan (about 255 trillion won), and privately owned small and midsize enterprises with active research and development investment will be included as beneficiaries.
Zou Lan, vice governor and Spokesperson of the central bank, said at a State Council press conference the previous day, regarding the possibility of a policy rate cut, "With the yuan stable and the dollar on a rate-cutting path, the exchange rate will not be such a strong constraint," adding, "Since last year, banks' net interest margins have shown signs of stabilizing, and internal factors such as large batches of 3-year and 5-year long-term deposits maturing this year are creating room for rate cuts."