China's Lending Rates Expected to Remain Unchanged

SHANGHAI (Reuters)
China is widely expected to leave its benchmark lending rates unchanged on Friday, according to a Reuters poll. Falling yields, shrinking net interest margins, and a weakening yuan are limiting immediate monetary easing.

Yield differentials between China and the U.S. reached their largest gap in 22 years this week, leading the yuan to its weakest point in over a year, despite a Federal Reserve interest rate cut.

The rapid decline in Chinese yields has prompted the central bank to warn against rate risks. However, a pledge by the Politburo to switch to an "appropriately loose" monetary policy stance next year has heightened market expectations for more easing in the coming months.

The loan prime rate (LPR), typically charged to banks' best clients, is calculated monthly after 20 designated commercial banks submit proposed rates to the People's Bank of China (PBOC).
In a Reuters survey of 27 market watchers conducted this week, all respondents expected both the one-year and five-year LPRs to remain steady.

"The central bank has just warned (against interest rate risk), it seems a bit inappropriate to cut interest rates right after that," said a trader at a Chinese bank.

On Wednesday, China's central bank urged financial institutions to guard against interest rate risks during bond trading, signaling discomfort over a recent buying frenzy that has sharply driven yields lower.

Earlier this month, the Politburo indicated that China will adopt an "appropriately loose" monetary policy next year, marking the first easing of its stance in 14 years, alongside a more proactive fiscal policy to spur economic growth.

Economists at Nomura anticipate that before the end of 2025, amid slowing growth and contained inflation, the PBOC will enact one round of 15-basis-point cuts to the 7-day reverse repo rate, the one-year LPR, and the five-year LPR in Q1, followed by another round of cuts in Q2.
They also expect a 50-basis-point reserve requirement ratio (RRR) cut before the year's end, with two additional cuts of the same size next year.

In October, Chinese lenders significantly reduced lending benchmarks to boost economic activity.