SHANGHAI (Reuters)

China left its benchmark lending rates unchanged, as expected, during the monthly fixing on Friday.

WHY IT’S IMPORTANT

Persistent deflationary pressure and tepid credit demand call for more stimulus to aid the broad economy. However, narrowing interest margins due to rapidly falling yields and a weakening yuan limit immediate monetary easing options.

BY THE NUMBERS

• The one-year loan prime rate (LPR) remains at 3.10%.
• The five-year LPR stays unchanged at 3.60%.

A recent Reuters poll of 27 market participants indicated that all expected both rates to remain steady.

CONTEXT

China’s central bank has urged financial institutions to manage interest rate risks when trading bonds, indicating unease among policymakers over a surge in buying that has sharply reduced yields. The Politburo stated earlier this month that China will adopt an “appropriately loose” monetary policy next year, marking the first easing in 14 years. This will be in conjunction with a more active fiscal policy to stimulate economic growth.

The widening yield spreads compared to the United States have pressured the yuan to its weakest level in over a year, with the disparity between China’s benchmark 10-year government bonds and their U.S. equivalents reaching a 22-year high.

According to a central bank official, China still has room to cut the reserve requirement ratio (RRR), which currently stands at an average of 6.6%.

KEY QUOTES

Tommy Xie, Head of Greater China Research at OCBC Bank
“The monetary policy stance will shift to being moderately loose, marking a significant departure from the prudent monetary policy regime in place since 2011.”
“We anticipate the PBOC will lower the one-year LPR by 40 basis points in 2025 and reduce the RRR by an additional 100 basis points, providing substantial liquidity support to the economy.”

Analysts at Golden Credit Rating
“We expect the central bank to cut the RRR by 0.25-0.5 percentage points by the end of the year to free up 500 billion yuan to 1 trillion yuan of funds. It can also consider liquidity arrangements for the Lunar New Year.”

The week-long Lunar New Year holidays in 2025 will start from January 28.