China’s Monetary Policy & Economic Recovery: PBOC Keeps Benchmark Lending Rates Unchanged

When the pandemic hit, it affected most economies, including China. However, China has been seen to recover after the pandemic due to the monetary policies set earlier last week. The PBOC kept its lending rates still for more than six months straight by March, which has helped stabilize the economy.

Chinese Monetary Policy

On March 17th, market watchers suggested that the Chinese government should ease monetary tightening before the People’s Bank of China announced a cut in money that must be set aside as reserves. Despite this, early last week, the five-year Prime Rate remained unchanged at about 4.29%, while the one-year LPR was kept at 3.59%.

According to Bruce Pang, an economist based at Jones Lang Lasalle, there is not an urgent necessity for interest rate cuts in the short term. He added that China is strained in easing monetary policies due to global monetary tightening and the yuan exchange rate.

Economists are now saying that if China continues to cut interest rates. At the same time, other countries raise them. The increased yield differentials could exert downside pressure on the Chinese currency and risk outflows. In the past months of 2023, a heap of data shows that economic activity has picked up as infrastructure investment and consumption have driven recovery from the pandemic interference.

This data has caused the property sector in China to experience an offset of weak global demand. However, during a poll conducted by Reuters last week, all twenty-two participants predicted that there would be no change to the Loan Prime Rate, marking an agreement from all the participants that had not been seen in previous surveys.

The ANZ senior China strategist, Xing Zhaopeng, differentiated the bank’s objectives in handling the Loan Prime Rate as a tool for promoting restrained demand in the country and the reserve requirement ratio, which it enforces on banks. To prevent banking chaos from pouring over to China due to the collapse of two regional U.S. banks this month, the RRR was cut last week.

The Spillover Effects

During the weekend, the PBOC deputy governor commented on how fast shifts in monetary policy abroad were having spillover effects, citing the collapse of SVB as an example. Economists thought that the RRR cut made a Loan Prime Rate cut less likely as it would also promote economic growth.

They also see room for the Loan Prime Rate to fall this year to lift market participants and support lending. The Mid-Term Lending lending rate serves as a guide to changing the Loan Prime Rate. In addition, the PBOC has ramped up medium-term liquidity injections when giving out maturity policy loans.

During the weekend, the PBOC deputy governor stated that the collapse of SVB had shown how fast shifts in monetary policy abroad were having spillover effects. Economists thought last week that a low prime rate cut was less likely as a rate cut would also promote economic growth. They also suggested that they see room for the Loan Prime Rate to fall this year to lift market participants and support lending.

The mid-term lending rate serves as a guide to changing the Loan Prime Rate. The PBOC ramped up medium-term liquidity injections when giving out maturity policy loans. However, the interest rates on those loans have not changed.