China leaves benchmark lending rates unchanged, as expected

China left benchmark lending rates unchanged at a monthly fixing on Wednesday, in line with market expectations, after the central bank kept a key policy rate steady last week amid some signs of improvement in the broad economy.

WHY IT'S IMPORTANT

China has set an economic growth target of "around 5 per cent" for 2024, a rate that economists say is ambitious and calls for more stimulus, including monetary and fiscal easing.

In particular, China needs to revive a battered property sector. Most new and outstanding loans in China are based on the one-year loan prime rate (LPR), while the five-year rate influences the pricing of mortgages.

But any sharp cuts to interest rates may put pressure on the yuan and banks whose net interest margins (NIMs) have been falling since last year.

BY THE NUMBERS

The one-year loan prime rate (LPR) was kept at 3.45 per cent, while the five-year LPR was unchanged at 3.95 per cent.

In a Reuters poll of 27 market watchers conducted this week, all respondents expected both rates would stay unchanged.

While China's factory output and retail sales beat expectations in the January-February period, property investment in China fell 9 per cent year-on-year in the first two months of 2024, after a sharp 24 per cent fall in December. Property sales also slid.

Credit growth has also slowed. Outstanding yuan loans grew 10.1 per cent in February from a year earlier - the lowest on record.

CONTEXT

China's central bank left its medium-term lending facility (MLF) rate unchanged last week. The MLF rate serves as a guide for LPR, which is set by 20 designated commercial banks.

But PBOC Governor Pan Gongsheng said earlier this month that the bank would keep the yuan basically stable and sent a dovish message to the market by saying China had "rich monetary policy tools at its disposal."

Investors have since ramped up bets that authorities will roll out more monetary easing measures, including a further reduction to bank reserves, to support the economy.