China has effectively lowered the loan prime rate (LPR), which serves as a benchmark interest rate, for the first time in seven months. Although the tariff war with the United States has entered a 90-day truce, the uncertainty in the economy remains high, indicating a continued need for stimulus measures.
The People's Bank of China, the Central Bank of China, announced on the 20th that it has lowered the one-year LPR from 3.1% to 3.0% by 0.1 percentage points. The five-year LPR has also decreased by 0.1 percentage points to 3.5%. This is the first reduction of the LPR by the Central Bank since it lowered the one-year and five-year rates by 0.25 percentage points each last October.
The LPR is the average interest rate charged by 20 major commercial banks for their top-tier clients. When the Central Bank announces the LPR, it serves as a benchmark interest rate for all financial institutions. The one-year LPR affects interest rates for general short-term loan products like credit and corporate loans. The five-year LPR serves as the standard for mortgage interest rates.
This LPR reduction was an anticipated measure. Pan Gongsheng, the governor of the People's Bank, noted earlier this month that it would lower the reserve requirement ratio (RRR) by 0.5 percentage points to inject 1 trillion yuan (approximately 192.7 trillion won) into the market, and that the LPR would also be lowered by 0.1 percentage points. This is intended to boost domestic demand and stabilize the market.
The interest rate decision was made against the backdrop of Chinese economic indicators that exceeded expectations. The market had anticipated that the impact of the high tariffs imposed by the U.S. on China would take effect starting in April, leading to an economic downturn. However, industrial production rebounded in the same month, defying expectations.
The U.S.-China trade war has also entered a 90-day truce, which may prevent a sharp economic decline. However, the growth in industrial production, consumption, and investment has slowed compared to the previous month, and ongoing weaknesses in real estate suggest that economic stimulus is still needed. Bloomberg News reported that "the temporary pause in the trade war has brightened the outlook for China's economy this year, but challenges such as deflation and weak domestic demand continue to cast a shadow over China's economic prospects."