On September 22, 2023, China made the decision to keep its benchmark lending rates unchanged for the fourth consecutive month. This move aligns with market expectations and comes on the heels of the People's Bank of China (PBOC) maintaining its main policy rate steady just a week prior. The decision to hold the loan prime rate (LPR) reflects the authorities' cautious approach to monetary easing in light of various economic factors.
The consistent loan prime rate fixings signal a careful strategy by Chinese authorities amid easing Sino-U.S. trade tensions, resilient export performance, and a recent rally in the stock market. This stability stands in contrast to visible signs of a domestic slowdown, compounded by the monetary easing actions taken by the Federal Reserve in the United States. The PBOC’s decision demonstrates its intent to balance economic growth with financial stability.
As of Monday, the one-year LPR remains fixed at 3.0%, while the five-year LPR is unchanged at 3.5%. A recent survey conducted by Reuters among 20 market participants showed unanimous predictions for no changes to these rates, despite the backdrop of weak economic data. This consensus underscores a cautious optimism regarding China's economic trajectory.
In the previous week, China's central bank also decided to keep the seven-day reverse repo rate steady, which has become the main policy rate for the country. Recent economic indicators reveal troubling trends, with factory output and retail sales in August reflecting their weakest growth rates since the previous year. These figures highlight the economic headwinds facing China and the potential slowdown in its domestic economy.
In a related context, U.S. President Donald Trump has indicated that he and Chinese President Xi Jinping have made progress on a TikTok agreement. They are scheduled to meet face-to-face in South Korea in six weeks to discuss critical issues including trade, illicit drugs, and the ongoing conflict related to Russia's war in Ukraine.
Financial analysts such as Barclays have expressed that anticipated stimulus measures may fall short if the tariff truce remains in place. They forecast a possible 10-basis-point cut in both the policy rate and the LPR, alongside a 50-basis-point cut in the reserve requirement ratio (RRR) in the fourth quarter of 2023. Similarly, Societe Generale emphasizes that the upcoming fourth plenum in October will be a significant event for domestic policy, as policymakers will review proposals for the 15th Five-Year Plan (FYP). They also predict the necessity for interest rate and RRR cuts in the near future.
Reporting by the Shanghai Newsroom; Editing by Kim Coghill and Jacqueline Wong.
