Economists say that if China cuts interest rates as other
countries raise them, widening yield differentials will put
downward pressure on the yuan and risk capital outflows.
A bout of data in the past two weeks has shown that economic
activity picked up in the first two months of 2023 as
consumption and infrastructure investment drove recovery from
pandemic disruption. That has offset weak global demand and a
persistent downturn in China's property sector.
In a Reuters poll conducted last week, all 22 participants predicted no change to either loan prime rate. Such unanimity has been rare in previous surveys. Xing Zhaopeng, senior China strategist at ANZ, distinguished the central bank's objectives in managing the LPR, its main tool for promoting or restraining demand, and the reserve requirement ratio (RRR) that it imposes on banks. Last week's RRR cut had been a reaction to the collapse of two regional U.S. banks this month, he said. "The central bank's RRR cut was more of an emergency response to prevent overseas banking crisis from spilling over to China," Xing said.
SPILLOVER EFFECTS Xuan Changneng, a deputy governor at the PBOC, said on the weekend that the collapse of Silicon Valley Bank (SVB) had showed how rapid shifts in monetary policy abroad were having spillover effects. An RRR cut nonetheless also promotes economic growth, so economists thought that last week's made an LPR cut less likely. In another move last week to lift demand, the PBOC ramped up medium-term liquidity injections when rolling over maturing policy loans, although it kept the interest rate on those loans unchanged. That rate, called the medium-term lending facility rate, serves as a guide to changes in the LPR. Some economists still see room for the LPR to fall this year to support lending and lift investor confidence. UBS expects the PBOC to encourage commercial banks to adjust deposit rates downward, cutting the banks' funding costs and making some room for the central bank to cut the LPR just a little. "China's LPR may be lowered slightly by 10 basis points in the rest of 2023, which could help lower the actual funding cost for the real economy and mortgage rates," said Wang Tao, UBS's chief China economist. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgage loans. China last cut both LPRs in August to boost the economy. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ China lending rates unchanged in March ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Winni Zhou and Brenda Goh; Graphics by Kripa Jayaram; Editing by Himani Sarkar and Bradley Perrett)
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