China Banks Keep Lending Rates Unchanged as Economy Rebounds

(Bloomberg) — China’s commercial lenders kept their benchmark lending rates unchanged on Thursday after the central bank held back from easing monetary policy this month as the economy rebounds.

Most Read from Bloomberg

The one-year loan prime rate was maintained at 3.65% for the eighth straight month, data from the People’s Bank of China showed, in line with economists’ forecasts. The five-year rate, a reference for mortgages, was kept steady at 4.3%, also matching expectations.

China’s economic recovery is strengthening, the property market is recovering and credit has surged, reducing the need for more central bank stimulus. The loan rates are based on the PBOC’s one-year policy loan rate, which was kept unchanged earlier this week.

The central bank also dialed back its cash injection into the financial system this week, a sign policymakers are watching the effects of past easing steps, including a March cut in the amount of cash lenders must hold in reserve.

“There’s not much necessity and urgency to lower the LPRs now since the economy had a good start of the year and its growth beat expectations,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “Credit and loan data have shown improvement in both quantity and structure.”

Profit growth at Chinese banks are under pressure as loan rates, including on mortgages, decline and they follow directives from the government to boost lending to small businesses. The squeeze has forced some local banks to lower their deposit rates recently, in line with moves by their larger rivals last year.

GDP Target

Recent signals from the central bank suggest it’s more optimistic about the economy’s outlook. In a statement last week after its quarterly policy meeting, the PBOC dropped a reference to three major growth risks — contracting demand, supply shocks, and weakening expectations — which it had highlighted in previous statements.

Story continues

Central bank governor Yi Gang also said last week the economy was on track to grow in line with the government’s 2023 GDP target of around 5%.

The messages have dampened speculation the PBOC will add more stimulus, especially with credit remaining fairly strong. State media reported Thursday that banks are likely to keep expanding loans.

Some analysts, including Bloomberg Economics, argue there’s still a need for more easing in coming months, to improve sluggish sentiment among households and businesses.

What Bloomberg Economics Says

There was little urgency for the PBOC to ease so soon after it cut banks’ reserve requirement ratio in March. A strong GDP rebound and fast credit expansion in the first quarter give policymakers some breathing room.

None of this means the PBOC has finished easing, though. We still expect it to lower its one-year rate this quarter, and that would likely prompt banks to follow suit and reduce their lending rates. The reason — the reopening-driven recovery in consumer spending may lose momentum after pent-up demand fades. A boost to confidence is key to spurring growth this year. A modest rate cut would signal that the policy stance will stay supportive — giving a lift to confidence.

— Eric Zhu, economist

Read the full report here.

–With assistance from Yujing Liu.

(Updates with background, economist’s comments.)

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.