Dec 19 2024: China is expected to hold its benchmark lending rates steady on Friday, according to a Reuters poll, as concerns over falling yields, shrinking net interest margins, and a weakening yuan limit the scope for immediate monetary easing.
The yield gap between China and the U.S. reached its widest in 22 years this week, exerting pressure on the yuan, which dropped to its lowest level in over a year, despite the Federal Reserve’s recent rate cut.
While Chinese yields have fallen sharply, prompting the central bank to caution against rate risks, a recent Politburo pledge to adopt an “appropriately loose” monetary policy stance next year has fueled expectations of further easing in the coming months.
The Loan Prime Rate (LPR), calculated monthly based on submissions from 20 designated commercial banks, is expected to remain unchanged. In a Reuters survey of 27 analysts, all predicted the one-year and five-year LPRs would stay steady.
“The central bank has just warned against interest rate risk, so it seems unlikely they would cut rates immediately,” said a trader at a Chinese bank.
On Wednesday, the People’s Bank of China (PBOC) urged financial institutions to manage rate risks in bond trading, signaling unease over a recent buying surge that pushed yields sharply lower.
Earlier this month, the Politburo signaled a policy shift, committing to an “appropriately loose” monetary stance next year, the first such easing in 14 years, alongside more proactive fiscal measures to boost growth.
Economists at Nomura anticipate two rounds of 15-basis-point cuts to the 7-day reverse repo rate, the one-year LPR, and the five-year LPR in the first half of 2025. Additionally, they expect a 50-basis-point reserve requirement ratio (RRR) cut by the end of this year, followed by two similar reductions in 2025.
In October, Chinese banks made larger-than-expected cuts to lending benchmarks in a bid to revitalize economic activity, highlighting Beijing’s commitment to supporting growth despite ongoing challenges.
