China’s benchmark interest rate freezes for 16 consecutive months… Possibility of cut within this year is ‘Solsol’

China has frozen the loan preferential rate (LPR), which serves as the de facto base rate, for 16 consecutive months.
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On the 20th, the People’s Bank of China, the central bank of China, announced that the one-year LPR for August stood at 3.85%, the same as the previous month. The 5-year LPR remains unchanged at 4.65%. It has maintained the same level for 16 consecutive months since April last year.

The People’s Bank of China regulates the lending rate with the LPR rate instead of the base rate, so the LPR is effectively serving as the base rate.

Previously, the market predicted that the LPR rate would be frozen. This is because, on the 15th, the People’s Bank of China maintained the one-year mid-term liquidity support window (MLF) rate at 2.95%, the same as the previous month. The MLF rate is also linked to the LPR. Since the LPR is an interest rate calculated by adding bank procurement costs and risk premiums to the one-year MLF, if the MLF rate is lowered, the LPR will also be cut.

However, as China’s economic recovery has recently slowed significantly, the possibility of a rate cut in the fourth quarter is being raised.

The economic indicators released by the National Bureau of Statistics of China on the 16th showed a slowing trend following the previous month. Retail sales in August, showing the domestic economy, rose 8.5% year-on-year. This is far below both the 12.1% increase in the previous month and the 11.5% expected by the market. Also, compared to July 2019, before the novel coronavirus infection (COVID-19), it increased by only 7.2%, and the average retail sales growth rate for two years was 3.6%.

Industrial production growth also increased by 6.4% compared to the same month of the previous year, but it slowed significantly compared to the previous month and fell short of market expectations. The growth rate of industrial production has continued to slow for five consecutive months after recording 35.1% in January and February due to the base effect of the COVID-19 crisis. Cumulative fixed asset investment in January-July, which is evaluated as China’s three major economic growth engines along with exports and consumption, also increased by 10.3% compared to the same period of the previous year, beating both the growth rate of January-June and market expectations.

Accordingly, additional stimulus, including monetary policy easing, is on the rise. Earlier, Bloomberg reported that some Chinese scholars were discussing the scope of further rate cuts by the authorities.

Some argue that liquidity will be supplied by reducing fiscal investment or further lowering the reserve ratio (reserve reserve ratio) rather than lowering interest rates. On the 15th of last month, the People’s Bank of China cut the reserve ratio of financial institutions by 0.5 percentage points to provide additional liquidity.

[자료=인민은행]