Chinese banks hold lending rates as yuan weakness looms

BEIJING – Chinese banks maintained their lending rates for a third month, with the central bank’s cautious easing measures doing little to drive down borrowing costs in the economy in the face of a weaker renminbi.

The one-year loan prime rate was held steady at 3.7 per cent, the People’s Bank of China (PBOC) said on Wednesday (April 20).

A slight majority of nine of 16 economists surveyed by Bloomberg had expected a cut.

The five-year rate, a reference for long-term loans including mortgages, was also unchanged at 4.6 per cent.

Loan prime rates (LPRs) are China’s de facto benchmark lending rates, based on the quotes that 18 banks offer their best customers and submit to the central bank. While the one-year LPR usually moves in lockstep with the PBOC’s one-year medium-term lending facility rate, which was left unchanged last week, analysts had predicted a drop because of several steps taken by the central bank recently to boost and ease funding costs for lenders.

The currency’s weakness is adding another complication, with lower rates reducing the appeal of Chinese assets to foreign investors, adding downward pressure on the renminbi.

The Chinese currency trading offshore weakened on Tuesday by the most since July last year as US Treasury yields surged and the US dollar strengthened. The PBOC set its reference rate for the renminbi at a weaker level on Wednesday.

The benchmark CSI 300 Index fell as much as 1.2 per cent, while the technology-heavy and more sensitive ChiNext Index dropped as much as 2.8 per cent.

Dr Iris Pang, chief economist for Greater China at ING Greop, said the PBOC’s actions have limited effect in boosting growth and focus should be on fiscal support.

“The PBOC itself says that is ample, so it’s not going to do a lot on monetary policy and that leaves more policy room for the fiscal side,” she said in an interview on Bloomberg TV. “Whether banks are ready to lend is a big question mark during this time, whether banks can identify the good credit quality borrowers is a big question.”

Although the PBOC took a number of steps recently to spur lending in the economy to help offset the economic damage of Covid-19 lockdowns, economists say the measures are not enough to give banks an incentive to lower their benchmark lending rates this month.

The cut in the reserve requirement ratio, or the amount of cash lenders must hold in reserve, earlier this month was only 25 basis points, smaller than the traditional 50 basis points and only takes effect on April 25, too late to impact the LPR quotes this month, according to economists .

Attention will shift to any easing signals from the meeting of the Communist Party’s Politburo, the highest-level decision-making body, traditionally scheduled at the end of April that discusses the economy.

More than 100 cities have lowered mortgage rates since last month, according to the PBOC, which made it less urgent for lenders to lower the LPR, said OCBC economist Tommy Xie.

The window for China to cut rates is narrowing as the country has lost its yield premium over the United States while funds return to haven assets amid risk-off sentiment due to the war in Ukraine and policy tightening by other major central banks.

The yield on China’s 10-year bonds is now more than 10 basis points lower than its US peer.

Markets will also look to credit data to gauge the effect of the central bank’s recent easing measures. Official statistics for last month showed weakness in long-term borrowing by companies and individuals, even though overall lending picked up faster than expected.

Some economists also see the possibility of the PBOC cutting policy interest rates next month to help the economy.

The one-year LPR was previously lowered in December and January, after the PBOC’s reserve requirement ratio and interest rate cuts.

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