China’s central bank is expected to maintain its benchmark lending rates unchanged at the monthly fixing next Monday. Despite this, markets are anticipating the introduction of more stimulus measures in response to the ongoing escalation of the Sino-U.S. trade war.
Policymakers face a delicate balancing act as the yuan continues to face downward pressure following U.S. President Donald Trump’s aggressive tariff policies. Meanwhile, banks’ shrinking interest margins are limiting the People’s Bank of China’s (PBOC) ability to ease monetary policy.
The Loan Prime Rate (LPR), which serves as the benchmark for lending to China’s most creditworthy clients, is determined each month after 20 designated commercial banks submit their proposed rates to the PBOC. A survey of 31 market analysts revealed that 87% of respondents expect both the one-year and five-year LPRs to remain unchanged, with only a small number predicting a reduction of 10 to 15 basis points in the five-year rate.
The one-year LPR is typically applied to most new and outstanding loans, while the five-year rate primarily influences mortgage pricing. China last reduced its policy rate in September, followed by a cut to benchmark LPRs in October.
“I don’t anticipate a LPR cut this month,” said one trader at a wealth management firm. “First, they would need to reduce deposit rates.”
A potential cut to deposit rates could alleviate the pressure on banks’ net interest margins, allowing them to lower lending rates further.
China’s GDP grew by 5.4% in the first quarter, surpassing expectations. However, there are growing concerns about a sharp economic slowdown, primarily due to the risk posed by escalating U.S. tariff policies. Export data has yet to fully reflect the impact of higher tariffs, as many factories rushed to complete orders before the new duties took effect.
The U.S. has raised tariffs on Chinese goods to 145%, prompting Beijing to retaliate with increased tariffs of 125% on U.S. products. This trade war has unsettled global markets and left investors wary of future developments.
Despite these concerns, market participants are still forecasting further monetary easing measures in the coming months to support the economy and cushion the impact of U.S. tariffs. However, any additional stimulus will need to be carefully managed to avoid exacerbating the depreciation of the yuan, which has fallen by 0.4% against the dollar since Trump’s announcement of global tariffs on April 2.
Ting Lu, chief China economist at Nomura, noted that while Beijing is unlikely to allow a sharp depreciation of the yuan in order to protect domestic financial markets and promote yuan internationalization, it may still take steps to bolster economic activity. Nomura maintains its forecast for a 50-basis-point cut to the reserve requirement ratio (RRR) and a 15-basis-point rate reduction in the second quarter.
“If U.S.-China tensions worsen, leading to significant stock market selloffs, the PBOC could respond quickly with RRR cuts, as it did in May 2019,” Lu added.
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