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The People’s Bank of China (PBOC) has decided to maintain its key benchmark lending rates steady, as the Chinese government assesses the outcomes of its recent economic stimulus initiatives. This announcement was made on Wednesday, when the central bank confirmed that the 1-year loan prime rate will remain at 3.1%, and the 5-year LPR will stay at 3.6%.
Analysts who were surveyed by Reuters had anticipated that the rates would remain unchanged this month. Bruce Pang, chief economist and head of research for Greater China at JLL, noted that there was “no immediate need to adjust the LPR this month.” He elaborated that Chinese leaders are likely in the process of evaluating the effectiveness of recent measures aimed at invigorating the economy.
Pang mentioned that the historically low net interest margins at Chinese commercial banks have constrained their capacity to offer lower lending rates. While it appears unlikely that there will be another cut in policy rates before the year concludes, he indicated that there could be opportunities for interest rate reductions in 2025.
The 1-year LPR is particularly significant as it impacts a broad range of corporate and household loans, whereas the 5-year LPR serves as a benchmark for mortgage rates. This current decision follows a cut of 25 basis points to both the 1-year and 5-year LPRs implemented last month and arrives in the wake of China’s October economic data, which highlighted a lack of momentum in the economy despite multiple recent stimulus measures.
In October, China’s economic indicators fell short of expectations, revealing a slowdown in industrial production and fixed asset investment growth. Notably, real estate investment experienced an annual decline that deepened compared to the previous year. However, retail sales showed some resilience, registering a 4.8% year-on-year increase, suggesting that the recent stimulus efforts were beginning to have a positive impact in certain sectors.
Since late September, the Chinese government has accelerated its stimulus announcements to boost economic activity, which has faced challenges due to an enduring property crisis along with weakened consumer and business confidence. Earlier in the month, the Ministry of Finance had introduced a substantial 5-year fiscal package, valued at 10 trillion yuan (approximately $1.4 trillion), aimed at addressing local government debt issues. The ministry also hinted at additional economic support likely coming in the next year.
Central bank Governor Pan Gongsheng expressed a commitment to maintaining a supportive monetary policy, adding that there remains potential for several key policy rate cuts by the end of this year.
Looking ahead, Morgan Stanley forecasts a slowdown in China’s growth, predicting around 4% in each of the next two years. The company has also downgraded Chinese equities to a “slight underweight,” citing concerns over a deflationary environment and escalating trade tensions as notable risks. The analysts stated, “we see a low limited chance that the Chinese government will front-load enough fiscal stimulus to target consumption and housing.”
Meanwhile, Goldman Sachs projects a decrease in China’s GDP growth to 4.5% in 2025, down from an estimated 4.9% this year. Despite these projections, Goldman maintains an “overweight” outlook on Chinese equities, forecasting a potential 13% increase for the benchmark CSI 300 index in the upcoming year.
Amid these economic dynamics, the anticipated victory of Donald Trump in the U.S. presidential election raises uncertainties for China’s export-reliant economy, particularly with the potential for increased tariffs on Chinese goods.
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