China left lending standards unchanged amid pressure from global interest rates

China left lending standards unchanged amid pressure from global interest rates

SHANGHAI (Reuters) – China on Tuesday kept benchmark lending rates unchanged at a monthly fix, as expected, as authorities appeared to halt immediate monetary easing after rapid declines in the local currency and as central banks elsewhere tightened policy.

The decision came just days before the Federal Reserve’s monetary policy meeting in September, when the US central bank is widely expected to aggressively raise interest rates to stem rampant price hikes.

The growing divergence in the monetary policies of the world’s two largest economies could spark fears of capital flight from China, just as Beijing seeks to mobilize resources to revive sluggish growth.

The one-year loan principal rate (LPR) was kept at 3.65%, while the five-year LPR remained unchanged at 4.30%.

In a Reuters poll this week, 21 out of 28 respondents, or 75% of all respondents, expected no change in either rate.

The steady LPR installs came after the People’s Bank of China (PBOC) last week left the medium-term interest rate unchanged, with some liquidity drained from the banking system.

China Lending Rates

The borrowing cost of a medium-term lending facility (MLF) serves as a guide to LPR, and markets typically use the medium-term rate as a precursor to any changes in lending criteria.

“This should come as no surprise as the MLF rate was kept unchanged earlier,” said Frances Cheung, interest rate analyst at OCBC Bank.

โ€œHowever, LPR reflects the overall funding costs of banks that have a negative range with lower deposit rates,โ€ Cheung added, noting that some major Chinese banks cut interest rates on personal deposits last week to ease pressure on margins.

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Analysts said policy makers are carefully striking a balance between supporting a slowing economy and not creating new economic risks.

The divergence in Beijing’s policy with most other major economies, which are aggressively raising interest rates to tame inflation, has increased pressure on the currency and limited room for further monetary easing.

China cut key interest rates in August, as Beijing ramped up efforts to revive an economy stymied by a property crisis and a resurgence of COVID-19 cases.

To cut or not to cut?

But these interest rate cuts precipitated the yuan’s declines. It has lost about 4% to the dollar since mid-August, breaking the psychologically significant 7 per dollar mark, and risking capital outflows.

“A full rate cut has always been one of the options in the PBOC’s toolbox, and the weakness has further reduced the chance of a rate cut,” OCBC’s Cheung said.

Capital outflow risks

The LPR, which banks typically charge their best customers, is set by 18 designated commercial banks that submit suggested rates to the People’s Bank of China (PBOC) each month.

Most new and outstanding loans in China are based on a one-year LPR, while the five-year rate affects the pricing of mortgages.

Marco Sun, chief financial market analyst at MUFG Bank (China), said economic indicators were surprised to the upside in August.

โ€œIf the recent economic recovery is not sustainable, the Chinese authorities are still likely to cut interest rates further,โ€ Sun added, anticipating the possibility of monetary easing in the fourth quarter.

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