The Central Bank of China, the People's Bank of China, has frozen the loan prime rate (LPR), which serves as the benchmark interest rate. This measure is taken into account the deepening depreciation of the yuan ahead of the expected arrival of the Trump administration's second term. However, as the Chinese leadership has adopted 'appropriate easing' as this year's monetary policy stance, the prevailing view is that a rate cut will take place soon.
On the 20th, the People's Bank of China announced that it would maintain the LPR for one-year and five-year loans at 3.1% and 3.6%, respectively. The People's Bank of China reduced the five-year rate to 3.95% in February last year, and in July, both the one-year and five-year rates were cut by 0.1 percentage points. In October, three months later, the cuts for the one-year and five-year LPRs were expanded to 0.25 percentage points, resulting in a downward adjustment. Since November, the rates have remained at the same levels for three months.
The LPR is the average interest rate for loans to the most prestigious clients of 20 major commercial banks. When the People's Bank of China announces the LPR, all financial institutions reference it for their loans, effectively serving as the benchmark rate. The one-year LPR affects the rates of general short-term loan products, such as credit and corporate loans. The five-year LPR serves as the benchmark for mortgage rates.
The freezing of the LPR this month by the People's Bank of China is interpreted as a measure considering the yuan's depreciation. CNBC reported, 'China's offshore yuan has fallen more than 3% since Donald Trump won the presidential election in early November last year,' noting that 'the strictly controlled onshore yuan has nearly reached its lowest point in 16 months.' As concerns grow over China's economic slowdown ahead of the anticipated arrival of the Trump administration, which is expected to adopt a tough stance on China, the value of the yuan has declined. If the benchmark interest rate is lowered again in this situation, the interest rate differential with the United States could further widen, exacerbating the currency's weakness.
However, the market believes that a reduction in the LPR is imminent. The Wall Street Journal (WSJ) reported, 'Many economists expect that the benchmark interest rate will be further lowered in 2025.' Previously, in December last year, the Chinese leadership indicated that it would shift this year's monetary policy stance from 'stability' to 'appropriate easing.' The Chinese government divides its monetary policy into six phases: 'tightening - appropriate - tightening - neutral - appropriate easing - easing.' This is the first time the stance has pivoted to easing since 2011.
There is also a possibility that the easing of the bank reserve requirement ratio (RRR) will start. The RRR is the ratio of the funds that a bank must deposit with the Central Bank out of the deposits it has collected. Lowering the RRR increases the amount of money that banks can utilize, enhancing market liquidity. The Chinese leadership stated in December last year, 'We will timely lower the bank reserve requirement ratio and benchmark interest rate to maintain adequate liquidity.'