World Stock Watch

Monetary Policy Stalemate: China Keeps Lending Rates Unchanged

As the Chinese economy struggles to gain momentum, Beijing has opted to maintain its benchmark lending rates for the third consecutive month. This decision comes as no surprise, given the weakening yuan’s constraints on the country’s monetary policy easing efforts.

Economic Growth Ambitions

China’s economy managed to hit the government’s 5% growth target last year, reducing the need for immediate monetary stimulus. However, the yuan’s recent depreciation has put pressure on the economy, making it challenging for policymakers to implement further easing measures.

The Lending Rate Landscape

At the monthly fixing on Monday, the one-year loan prime rate (LPR) remained steady at 3.1%, while the five-year LPR held firm at 3.6%. These rates have a significant impact on the economy, as most new and outstanding loans in China are based on the one-year LPR, and the five-year rate influences mortgage pricing.

A Shift in Monetary Policy

In October 2024, Chinese lenders made significant cuts to lending benchmarks to revitalize economic activity. However, the current economic climate has led to a shift in approach. With banks’ interest rate margins narrowing, the scope for monetary easing is limited.

Yuan Depreciation Pressures

To combat the declining yuan, China has implemented various measures, including verbal warnings, tweaks to capital flows, and the issuance of offshore yuan bills. As a result, investors are scaling back their bets on near-term rate cuts, expecting authorities to refrain from easing policy while the yuan remains weak.

Policy Outlook

The Politburo has announced plans to adopt an “appropriately loose” monetary policy in 2025, marking a significant shift in stance after 14 years. This move will be accompanied by a more proactive fiscal policy aimed at stimulating economic growth. As the economic landscape continues to evolve, China’s policymakers will need to navigate the complex interplay between monetary policy, currency fluctuations, and economic growth.