(Yicai) Sep. 21 -- China’s central bank kept both the one-year and over-five-year loan prime rates unchanged this month, maintaining 16 consecutive months of borrowing stability. This decision was in line with market expectations and reflects a cautious approach amid domestic economic conditions, banks’ operating pressures and overseas monetary policy, several experts told Yicai. They said there is limited need for a rate cate in the short term.

The one-year LPR, a key reference for consumer and corporate loans, was held at 3 percent, and the over-five-year LPR, which guides mortgage rates, remained at 3.5 percent, the National Interbank Funding Center announced today on behalf of the People’s Bank of China.

The LPR has remained stable this year due to several factors, said Wang Qing, chief macro analyst at Golden Credit Rating International. China’s economy grew 4.7 percent in the first half, falling within the government’s full-year growth target range of 4.5 percent to 5 percent, while emerging areas of productivity, particularly advanced manufacturing, have continued to expand rapidly.

This means that although domestic investment and consumption have weakened since the second quarter and economic growth momentum has moderated, macroeconomic policy remains relatively strong and monetary policy is still in an observation phase, Wang said. This was the fundamental reason for leaving the LPR unchanged in September.

LPR quoting banks do not have much incentive to trim their lending spreads given the need to maintain stable operations and manage risks, said Dong Ximiao, chief economist at CMB-China Unicom Consumption Finance.

Wang also noted that commercial banks’ wholesale financing costs in the money market have recently risen. From the perspective of funding costs and net interest margins, banks currently have little incentive to lower the spreads incorporated into LPR quotations.

External Headwinds

External factors have also placed greater constraints on a near-term LPR cut. Before the release of this month’s LPR, the Federal Reserve hiked interest rates by 25 basis points, further widening the inverted interest-rate differential between China and the United States and putting additional pressure on the yuan exchange rate and cross-border capital flows.

Dong said this has objectively reduced the room for the PBOC to cut interest rates and for the LPR to decline, making a near-time LPR cut less likely.

But tighter overseas monetary conditions will not alter the overall direction of China’s monetary policy. Both the European Central Bank and the Bank of Japan have raised interest rates, while the Fed increased its ‌target range for the federal funds rate in September, said Wen Bin, chief economist at China Minsheng Bank. Bond yields in many overseas markets have also risen.

Against this backdrop, China’s bond yields have remained relatively steady and the yuan exchange rate has maintained a broadly stable trend, Wen said, adding that the impact on China has been limited.

Policy Outlook

The performance of bond yields and the yuan reflects the relatively strong safe-haven nature of Chinese assets, which gives China greater room to pursue monetary policy based on domestic conditions, Wen said. Future adjustments to policy interest rates will depend on economic fundamentals and the net interest margin of commercial banks, with LPR quotations likely to move in line with policy rates.

Looking ahead, Wen said interest rates on newly issued corporate and residential housing loans remained at low levels in August. Together with a modest year-on-year recovery in the growth of the consumer price index, a key measure of inflation, and the producer price index, a gauge of factory gate prices, the actual interest rates on loans have edged lower, providing greater support to the real economy. As a result, there is limited need for a direct cut in policy rates at present.

The Fed’s interest rate hike has strengthened external constraints, and the LPR is likely to remain unchanged in the near term, Dong said. Whether the LPR falls in the future depends on the pace of domestic economic recovery, inflation trends, banks’ net interest margins and changes in the external environment.

China still has a broad range of monetary policy tools at its disposal, leaving room for further monetary policy measures if necessary, Dong said.

Editor: Kim Taylor