China leaves key lending benchmarks unchanged in line with expectations

China’s decision to keep its benchmark lending rates unchanged in August aligns with market expectations, reflecting the challenges facing the country’s banking sector. The one-year Loan Prime Rate (LPR) remains at 3.35%, and the five-year LPR is steady at 3.85%. These rates are crucial, as the one-year LPR serves as the reference for most loans, while the five-year LPR influences mortgage pricing.

The decision to maintain rates comes despite previous cuts in key interest rates in July, which marked China’s first broad easing move in nearly a year. These earlier cuts were intended to signal a shift in the People’s Bank of China’s (PBOC) monetary framework, with a greater emphasis on short-term rates to guide market expectations and stimulate economic growth.

However, the unchanged LPR reflects the challenges faced by Chinese banks, including shrinking interest margins, which limit their ability to further reduce rates without impacting profitability. Additionally, weak credit demand and seasonal factors have led to a significant drop in bank lending, reaching its lowest level in nearly 15 years. This has raised concerns about the effectiveness of monetary easing in stimulating the economy.

Economists argue that China needs to complement its monetary policy with expansionary fiscal measures to boost domestic demand and support economic growth. They anticipate further easing steps, including a 25-basis-point cut in the reserve requirement ratio (RRR) in the third quarter and a 10-basis-point policy rate cut in the fourth quarter. These measures are seen as necessary to maintain real GDP growth close to 5% in the second half of 2024, amid ongoing economic headwinds.